芯源系統 (MPWR) 2014 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Monolithic Power Systems Inc. Q4 and full-year 2014 earnings conference call. At this time, all participants are in a listen-only mode.

(Operator Instructions)

As a reminder, this conference call is being recorded. I'd like to turn the conference over to Ms. Meera Rao, CFO of Monolithic Power Systems. Ma'am, you may begin.

Thank you, Candace. Good afternoon and welcome to the fourth quarter and FY14 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, 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 statements contained in the Q4 earnings release and in our SEC filings, including our Form 10-K filed on March 10, 2014, and our Form 10-Q filed on October 31, 2014, which are 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 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 Q4 releases for both 2013 and 2014, 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.

MPS is pleased to announce record annual revenue of $282.5 million. Full-year revenue growth of 18.7% clearly outperform the analog industry, which SIA estimates grew 10.2% over the prior year. For 2014, MPS's non-GAAP gross margin also expanded 60 basis points to 54.6%. Further, our non-GAAP operating income, excluding the $9.5 million O2 payment Micro payment, grew 3.6% to $60.6 million, achieving record non-GAAP EPS of $1.43, a stellar growth rate of 34.9% over 2013. Over our first decade as a public company, we have grown consistently and organically at a compound annual growth rate of 19.5%. Over that same period our shareholder return, measured in stock price appreciation, grew at a CAGR of 17.5% per year.

Diving into year-over-year revenue growth by market, industrial was up a record 43.3%, consumer revenue grew 22.8%, and communications also increased 15.3% over 2013. Let me speak to the results of each end market.

In industrial and automotive markets, sales rose to $49 million, fueled by product sales for applications for smart meters, automotive, security, and power adaptors. We've also seen significant design win activities in industrial and automotive. These design win activities will continue to translate into revenue growth in 2015 and 2016.

Revenue from consumer markets increased to $122.8 million, driven primarily by high-value consumer markets like gaming, LED lighting, battery management, and home appliances. Communications revenue grew to $64.6 million, fueled largely by growth in networking and telecom opportunities. Computing revenue was down $1.8 million to $46.1 million, mainly due to the ramp down in a huge HDD client program that bottomed out in the first quarter of 2014, offsetting the growth in SSD.

Switching to Q4. MPS had a record fourth quarter with revenue of $75.7 million, representing year-over-year growth of 19.1%. Our fourth quarter revenue was above the midpoint of our guidance. Non-GAAP gross margin was 54.9%, the same as the third quarter, and 70 basis points higher than the 54.2% reported in the fourth quarter from a year ago. Our non-GAAP operating income was $18.3 million compared to the $19.6 million reported in the prior quarter and the $13.7 million reported in the fourth quarter of 2013. Q4 non-GAAP net income was $17.2 million, or $0.43 per fully-diluted share, compared with $0.46 per share in the previous quarter and $0.32 per share in the fourth quarter of 2013.

Let's review our operating expenses. Our non-GAAP fourth quarter 2014 operating expenses were $23.3 million, essentially flat with the $23.4 million we spent in the third quarter. Our GAAP operating expenses were $31.8 million in the fourth quarter, compared with $32 million in the third quarter. The difference between non-GAAP operating expenses and GAAP operating expenses for these quarters is stock compensation expense, income or loss on an unfunded deferred compensation plan, and acquisition-related transaction costs, specifically in the third quarter. Stock comp expense attributable to operating expenses was $8.3 million in the fourth quarter compared with $8.6 million in the prior quarter. In addition, we incurred approximately $107,000 of deal-related expenses in relation to the Sensima acquisition in the third quarter of 2014.

Investment income related to an unfunded deferred compensation plan reduced GAAP operating expenses by $110,000 in the third quarter, but added $175,000 of expense to the fourth quarter. On a non-GAAP basis, our Q4 net income was $17.2 million or $0.43 per fully diluted share. This result is computed with an estimated tax rate of 7.5%. Q4 2014 GAAP net income was $8.9 million, or $0.22 per fully diluted share.

Now let's look at the balance sheet. Cash, cash equivalents, and investments were $244.1 million at the end of the fourth quarter of 2014, above the $238.5 million at the end of the prior quarter. In Q4, MPS generated operating cash flow of about $20.6 million. Cash proceeds from employee stock option exercises contributed $1.5 million. These cash inflows were partially offset by $8.2 million of expenditures to purchase 194,000 shares under our stock buyback program. In Q4, we also funded the $5.8 million quarterly dividend declared in Q3 and we purchased $2.4 million of capital equipment.

Accounts receivable ended the fourth quarter at $25.6 million, higher than the $24.3 million at the end of the prior quarter, due to higher sales in the third month of Q4 compared to the prior quarter. Days of sales outstanding were up to 31 days in the fourth quarter from the 28 days in the prior quarter, and down from the 34 days in the year-ago quarter.

Our internal inventories at the end of the fourth quarter were $40.9 million, essentially flat with the $41.6 million at the end of the prior quarter. Days of inventory increased to 107 days at the end of Q4 from the 105 days at the end of Q3. Days of inventory in the distributor channel were once again lower than the prior quarter and at the lowest level we have seen in the last two years.

I would now like to turn to outlook for the first quarter of 2015. We are forecasting Q1 revenue in the range of $70 million to $74 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 53.5% to 54.5%; 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 $100,000 to $200,000; non-GAAP R&D and SG&A expense to be in the range of $23.3 million to $24.3 million. This estimate excludes stock compensation expense and litigation expenses. Fully diluted shares to be in the range of 40.4 million to 40.8 million shares before share buyback.

In conclusion, MPS had outstanding results in its first decade as a public company. Our product diversity strategy, backed by MPS's proprietary leading edge technology, has proven successful. Looking ahead into the next decade, we will continue to execute the strategy for sustainable and consistent growth and thereby enhance value to our shareholders.

I'll now open the microphone for questions.

(Operator Instructions)

Tore Svanberg, Stifel.

So my first question is on your communications business. It was up 10% sequentially, which sort of bucks the trend seasonally and maybe even in relation to some of your peers. So can you talk a little bit about what's going on with that business and would you expect the momentum to continue?

The increase quarter-over-quarter increase that you saw in Q4 was in our traditional gateway business which, if you remember back in Q3, had been a little choppy and lower than we expected. So you are correct, it is seasonally higher.

Looking into Q1, I do expect to see some seasonal weakness in our traditional gateway business. Our networking and telecommunication business has been steady through the fourth quarter and we expect the same in the first quarter.

Very good. And my next question, and I don't want to necessarily pick on anything negative, but the one area that saw a decline last year was your storage and computing business. Obviously there were some specific reasons why, but as we look into 2015, should we expect that business to show growth more in line with what your SSD business is doing?

Yes, because we have less exposure from the declined HHD business, and our SSD the business will continue to grow over the year.

Okay, very good. And then, again, looking at 2015 and looking at your four segments, can you maybe rank what segment you expect to grow relatively faster and relatively lower?

We expect all four segments to grow and I've never been a fan for ranking them. We expect, particularly in the newer products in each of these markets, we expect to see very good growth next year.

And also the computing business and a lot of our design wins will come in as a revenue in the second half of the year.

Okay, very good, and just one last question. Can you talk a little bit about your relative visibility here in this quarter? I know this quarter is seasonally a down quarter with Chinese New Year and so on. But just relatively speaking how's your visibility looking for the quarter in terms of backlog or bookings, momentum, or anything like that? Thanks.

It's a quarter where we came in with very good booking, backlog rather, and we have continued to see good booking. We feel comfortable about the guidance we've given and very confident right now.

Very good. Thank you thank you and congratulations again.

Steve Smigie, Raymond James.

Another solid year, I think 19% gross, pretty close to 20% there. Can you comment, Michael, on what you see as the opportunity for this year with all the new products, you're talking about the growth, could you do another 20% growth year or better?

I cannot predict -- what the percentages are really depends on the microeconomics. But I can tell you this: and whatever we, in the past three or four years, we did, obviously, we did the right thing. All the results come from what we did three years or four years ago.

And the next year result is what we -- what we plan to see in about one year, two years, three years ago, and everything is all the indications are we're on the right track. And from a computing to a cloud computing, mainly servers, communication side, and also industrial and automotive. And all of these segments, we are doing really well.

Okay great. And specific to the server market, we saw, obviously Infineon and the International Rectifier merge, and then obviously Maxim bought out another of the competitors in this space, it seems like it is opening up a lot of you guys, plus you have some of these real innovations. Can you talk about the opportunity in the server market in 2015 and maybe even into 2016 as you maybe get some designs -- opportunity to ramp into 2016?

Yes. And obviously it presents another MPS as a player and that we have a much better chance now. But server market is a very conservative.

And the name of a company has an effect for how and when you use your part. Our point of loads are very successful now and also the v-core and we start to shipping now.

Just to add to that very quickly, for this year's revenue all the design wins have already been done back in 2014 and so we've seen that play through. I think as next year comes out, that's going to get more interesting because that's where the consolidation in the marketplace -- plus it will be our second round in this market. All those things would play to our benefit.

Okay, last question if I could sneak one more in. Just as we look at gross margin going forward it seems like you're getting decent traction on the newer products, and those carry higher gross margin historically.

What's the gross margin expansion opportunity there as the mix improves? Could it be 200 basis points or better for the year?

As we've been saying in the past, we expect to grow our gross margin steadily and consistently. As you know, as we get more of the higher-margin revenue we have opportunity to be taking some of the lower-margin revenue so that we can accelerate top line and bottom line growth. And we expect to do the same so I can say over time, as revenue grows I would expect to see a slow and steady increase in gross margin.

Great, thanks a lot and congratulations on the numbers.

Ross Seymore, Deutsche Bank.

Good afternoon guys, this is actually Matt Diamond on for Ross. I want to ask a question that's been alluded to earlier but I'm going to ask it a little bit of a different way.

Could you walk us through the drivers of your long-term growth? There's a target out there of 20% to 25%. I'm just curious what drivers you see to get there over the next year or so, the next two to three years even, any of the biggest positives and negatives you can see at this point?

As you know, one of our key strategies is to grow through diversification so we expect the growth to come in from multiple markets. For example, if you take communications, some of the growth is coming from the newer networking and telecom market. We could also opportunistically play more in the traditional gateway business.

When you look at computing, our growth opportunity comes both from the SSD storage as well as cloud computing. And as we look at consumer, particularly our newer high-value market opportunities, markets like battery management, LED lighting, home appliances, gaming, all these will be growth areas. Not to forget industrial, where we have had multiple markets that are growing in industrial as well as automotive.

And in addition to all this we have module, which will be contributing revenue this year. So all these together will be contributing growth for us this year and more so next year, and we feel very confident about that we are going to have strong growth. But since we don't forecast more than a quarter, I don't feel comfortable saying our growth could be X% or Y%, but you're right, our long-term growth model is to grow top line at 20%, 25%.

All of these Meera mentioned, they are doing really well in 2014. And Meera missed another big component of it, the AC to DC. And that contributes a tremendous revenue and we will continue to focus and it contributes to growth.

Got it, and in the same vein could you talk about your OPEX trajectory for 2015? I know it has been mentioned that you have enough capacity for these new products, but I'm wondering if anything has changed from 3Q to 4Q OPEX-wise as far as the trajectory for 2015?

Our Q4 OPEX was the same level as Q3. It was a little higher than guidance and part of the reason is that we had higher new product development cost that we saw in Q4. So going forward into 2015, other than the pay raises which we talked about in the last call, we do expect, as revenue grows we will continue to increase our investment because that helps us grow even faster in outer years.

So we will do some investment in both the R&D side as well as in sales and marketing. But it will be in line with revenue growth, meaning that the revenue growth is going to be higher.

Okay, great. Thanks very much.

Anil Doradla, William Blair.

Meera, can you comment about the inventory levels in the channel (technical difficulties) what you're seeing out there? And I have a follow-up.

Sure. Inventory in the channel, when we came into the fourth quarter it was already lower than the level we had been operating in for the last two years. And given the concerns that we had heard across the industry of perhaps some softness in Q4, we continue to manage the inventory in the channels fairly lean in Q4, and as a result we came in even lower than the prior quarter. And our expectation is as we see business improve over the next few quarters, we will take inventory in the channel back up to the levels that we typically operate at.

Okay, great. And Michael, recently you had acquired a Swiss company, Sensima, the motor -- touchless motor company. What's the latest on that front and are there any revenues yet to (technical difficulties) Monolithic Power from that acquisition?

Yes, with the growth and visiting the -- our visit, visiting our customers a couple of times. The results are great, and some of us -- some of the opportunity we got revenue and the other ones take a little longer time. In a couple of years our shareholders will thank MPS, buy this company.

(technical difficulties) current revenue that we have, we have very littlerevenue currently, but the design wins are shaping up nicely and that's where we expect to see a lot more revenue in future years.

(Multiple speakers) and the technology will revolutionize the motion control.

Great.

Many other competitors didn't realize that.

Right. And I don't know how to ask this, but you've talked about the price line and the design wins and two to three years ago are shaping out the revenues this year, last year, but there's a delay. If you were to look at the pipeline and if there was a discount factor to the actual revenues, can you share with us some color about that? Typically the pipeline is at, discounted, like 60%, 70%, or whatever has been the price range has more or less translated in revenue.

How has that evolved over time? (Technical difficulties) I mean qualitatively. Thank you very much and congrats.

We haven't looked at it with a discount our design wins. Typically, once we have the design wins we do see revenue come in. A lot of how much revenue comes in depends upon how end customers succeed in the marketplace. And also depends upon the macro, but we have been, I would say, overall very happy with the conversion of design wins into revenue.

Great, thanks, guys.

Ruben Roy, Piper Jaffray.

Meera, I'm wondering if you could just give us a little bit of commentary on the server side of the storage and computing business near-term, kind of, was it as expected in Q4? And maybe an update on the Grantley cycle would be great. Thanks.

On the Grantley cycle, this is one where most of the design wins had been completed in 2013 and 2014. We started seeing our first revenue in Q3, and we -- this ramped in Q4 and we expect to see this ramping up continue to ramp this year.

Most of the design wins on the Grantley service side are in the point of load. We do have a few v-core design wins at some of the emerging server makers in Asia.

And the US.

And the second tier in the US. And so this is the first cycle for us, where we prove as our products. We do have superior products but they're to prove ourselves as a supplier and that our products are reliable. And we are very excited about all the design activity that's taking place for the next cycle because we feel they are better positioned as a result of having played in the Grantley cycle.

That's really helpful. Thanks, Meera.

And to that end, on the last bit of commentary, for the next cycle, I guess which includes Purley from Intel, would you say that you have both a content driver coming as well as market share? Or is it just market share, is there no additional content coming?

I agree on both.

Okay. Then just finally, I had a follow-up question on the storage side. You had Q1 of last year, the hit from the one OEM, solid-state drives were big growth driver.

I think you're running solid state drives at a third, maybe a little bit better, as a portion of the overall storage business. Do you have an idea as you look out into 2015 based on design wins where solid-state drives end up and what that might do for growth in that storage area? Thank you.

Sure. SSD drive revenue in storage is more than half of that. I think it's close to 60%. And so most of our design wins are either on the enterprise side or on the client, high-end client-side.

So our design wins are playing out, we also have a second SSD PMIC that we've introduced, but this one is targeting PCIe and SAS. And we expect to see revenue on that in the second half of this year as well. And so all these things together will be driving our growth.

Great, thanks, Meera.

Rick Schafer, Oppenheimer.

Hey guys, this is Shawn Simmons calling in for Rick. Congrats on the good results and guide.

My first question just centers around your automotive and industrial business. You guys saw a nice uptick here last year, I guess how do you view that business for 2015? Do expect to see sort of the same incremental growth and can you potentially quantify automotive now as a percentage of sales?

Let me answer that. The industrial automotive business, as you know, has a long designing cycle. These are revenues all happening three or four years ago and where we start to focus on it.

For next year I will see continue to grow in terms of -- quantify the numbers and we don't disclose that and I'll let Meera to mention it. The trend is we focus on three or four years ago and we continue to focus on and the number will grow.

We've always said in the past for the last two, three years is that industrial is always the slowest to grow and we expect steady growth, and we recognize that we've actually done a lot better than that. And I expect 2015 results are going to be better than the slow and steady nature of growth that we typically associate with industrial. But in terms of an actual growth percentage, we don't give that kind of guidance. I would say at this point automotive is one of the four big drivers in this, and I expect as this year goes through it will be one of the faster growing drivers within the industrial and automotive segment.

Okay, great, and if I can follow-up on that. Have your two distribution agreements from last year, has that by any chance accelerated that growth in there? How are those relationships progressing?

Those relationships are largely for industrial and automotive revenues. And so the design wins that they are generating would be revenue out later in time just because the time it takes to convert the design win in industrial and automotive. So they have been very helpful but that's going to be a future year's growth.

Okay, great. And then my last question is just on the power modules. I know you guys are expecting to see some revenues this year, and how significant do you think that can be? And where do you expect some of those initial design wins to start ramping?

We have our design wins currently for the first four or five modules that we introduced, we already have design wins that is in practically every market that we play in. But as we've said before, just looking at the time to convert from design wins to revenue, consumer's always the fastest, so the revenue we expect to see this year will mostly be consumer.

We would be very happy if some of the others converted also this year. We expect the revenues from modules -- all I'm willing to say is --

Double it. Double it because the number is small.

In 2003 we introduced five or six modules. In 2014 we introduced three times the amount, like 15, 16. So those products will generate revenue in 18 months to 36 months timeframe.

Okay, great. Thanks, guys.

Liwen Zhang, Blaylock Beal Van.

Actually, thank you. My question has been answered. Congratulations as well.

Steve Smigie, Raymond James.

Meera, I just wanted to follow up on the modules. As you'd said you talked about those doing fairly well here in consumer.

I'm just curious, what are the margins like on those consumers? On the one hand, I feel like the modules are very differentiated products so I'd expect something better, but at the end of the day it's still the consumer market. So I was just hoping to could get some color on that.

Yes, we expect the margins on all the modules to be good. Even in the consumer market it will be above consumer margins.

Above corporate average.

Above corporate average, too.

Okay. And again, you guys have done a good job, I think, trying to diversify away from just being a consumer company. With that said, it's in some extent good to hear consumer's probably actually going to grow here, right? As the modules take off, is that fair to think because of the success of the modules that you can still have healthy growth in consumer?

We expect to have healthy growth in consumer not just because of the modules but also because some of these newer high-value opportunities that we have found like battery management, LED lighting -- (Multiple speakers)

These are wearable goods and the sports cameras, these are all very high -- customers that will appreciate our technologies. And they will pay for those type of products. You'll see it in internet of things emerging, and it a lot more demand for those type of products.

(Multiple speakers) they present a lot of opportunity for our modules.

Okay. Meera, on your comment about gross margins, as you said, you will have the newer products growing and getting the higher gross margins. But you're also going to take some lower margin stuff, given that opportunity. Is that lower margin stuff that you would take, is that consumer or is it kind of spread out across the end markets there?

I would say it's in a traditional consumer -- maybe even in a traditional gateway business, those are the kinds of markets that we play in opportunistically. But the net idea that at the end of the day, when our revenue grows we still expect to show an expansion net-net in our gross margin.

Right. And on that gateway stuff, obviously have some exciting new stuff ramping in comms but I think decent chunk of comms is still the gateway business. How are you trying to manage that gateway revenue? Do you keep trying to grow that as well, or is it more just kind of a cash cow business?

For us, as we see opportunities we keep playing. How much we pick up is all driven by how our revenues and margins are playing out. So it's an opportunistic play for us.

Okay. Great. And you talked about, in industrial, now the last question, I promise, is just you had -- auto is one of the major drivers. Can you just give the other three major drivers in there?

Sure, we have smart meters, we have security and surveillance, and then we also have power adoptors.

Okay, and any particular one of those you expect to do better in 2015 versus the others?

Automotive.

Okay, great. Thank you.

Thank you and I'm showing no further questions at this time. I would like to turn the conference back over to Meera Rao for any closing remarks.

Thank you for joining us for this call and we look forward to talking to you again in April for our next conference call. Thank you. Have a nice day.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program and you may all disconnect. Have a great day, everyone.