芯源系統 (MPWR) 2015 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Monolithic Power Systems Q1 2015 earnings conference call.

(Operator Instructions)

As a reminder, today's conference is being recorded.

I would now like to turn the conference over to Meera Rao, CFO of Monolithic Power Systems. Ma'am, please go ahead.

Thank you. Good afternoon, and welcome to the first quarter 2015 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 Q1 earnings release and in our SEC filings, including our Form 10-K filed on March 2, 2015, 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, other 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 2014, Q4 2014, and Q1 2015 releases, 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.

MPS is pleased to announce record first quarter revenue of $73.5 million, representing a 22% increase from the first quarter of 2014. This year-over-year increase, which was well above the industry average, was fueled by diversified growth in revenue from all four segments. MPS's non-GAAP gross margin also expanded 100 basis points year-over-year to 54.8%.

Excluding the one-time payment of $9.5 million from O2 Micro in Q1 last year, our non-GAAP operating income of $15.6 million grew 117%, and non-GAAP EPS of $0.37 increased $0.20 over the first quarter of 2014. Looking at year-over-year revenue growth by market segment, industrial was up a record 36%, communications revenue grew 27.4%, consumer revenue was higher by 20.8%, and computing also increased by 7.5% over 2014.

Let me speak to the results of each end market. In the industrial market, sales rose to $13.3 million, fueled by product sales for applications in automotive, smart meters, and power sources. Communications revenue grew to $17.3 million, largely attributable to growth in networking and telecom opportunities. Gateway revenue also increased year-over-year on market share gains.

Revenue from consumer markets increased to $31.5 million, driven primarily by high-value consumer markets like home appliances, gaming, battery management, and LED lighting. Computing revenue also increased to $11.4 million.

Turning to the financials. Our first quarter revenue of $73.5 million was above the midpoint of our guidance. Compared with Q4 2014, revenue decreased by $2.2 million, or 2.9% on seasonally lower income -- I'm sorry, on seasonally lower revenue in the consumer client-based gateway, and computing segments.

Non-GAAP gross margin was 54.8%, slightly lower than the prior quarter. Our non-GAAP operating income was $15.6 million, compared to the $18.3 million reported in the prior quarter. Q1 non-GAAP net income was $14.9 million, or $0.37 per fully diluted share, compared with $0.43 per share in the previous quarter.

Let's review our operating expenses. Our non-GAAP first quarter 2015 operating expenses were $24.7 million, $1.4 million higher than the $23.3 million we spent in the fourth quarter, mainly due to higher new product spending and increased compensation costs due to pay raises and higher payroll taxes. Our GAAP operating expenses were $33.8 million in the first quarter, compared with $31.8 million in the fourth quarter.

The difference between non-GAAP operating expenses and GAAP operating expenses for these quarters is stock compensation expense, as well as expense on an unfunded deferred compensation plan. Stock comp expense included in operating expenses was $9 million in the first quarter, compared with $8.3 million in the prior quarter. Investment expense related to the deferred comp plan increased GAAP operating expenses by $166,000 in the first quarter of 2015, compared to $176,000 of expense in the fourth quarter.

Turning to other income. First quarter non-GAAP other income of $516,000 was $229,000 higher than the prior quarter, primarily due to foreign exchange --

(Technical Difficulties)

Ladies and gentlemen, please standby. The conference call will resume momentarily.

(Operator Instructions)

Now, let's look at the balance sheet. Cash, cash equivalents, and investments were $239.2 million at the end of the first quarter of 2015, slightly below the $244.1 million at the end of the prior quarter. This reduction in cash was attributable primarily to the $10.4 million we spent to purchase 203,000 shares under our stock buyback program, payment of the $5.9 million quarterly dividend, and $4.7 million of capital equipment purchases.

In Q1, MPS generated operating cash flow of about $13.6 million. Cash proceeds from employee stock option exercises and employee stock plan purchases contributed another $2.4 million. Accounts receivable ended the first quarter at $25.3 million, down from the $25.6 million at the end of the prior quarter.

Days of sales outstanding were 31 days in both the first quarter 2015 and the fourth quarter 2014, and down from the 33 days in the year ago quarter. Our internal inventories at the end of the first quarter were $53.4 million. Higher than the $40.9 million at the end of the prior quarter.

Days of inventory increased to 144 days at the end of Q1, from the 107 days at the end of Q4. Inventory in our distribution channel increased from the prior quarter when inventory was lower than usual.

Turning to the resolution of matters with the US Internal Revenue Service. On April 21, 2015, the IRS signed a formal closing agreement with MPS that resolves the IRS audit of the Company's taxes for the years 2005 through 2007. The resolution includes the following elements.

During the second quarter of 2015, MPS will make a payment of $1.2 million for taxes related primarily to the revaluation of a license for certain intellectual property rights of the Company to one of its foreign subsidiaries. The buying payment is final, and no additional payment will be required with respect to the intellectual property license for the years under examination or for a previous or subsequent tax year.

MPS expects to make a related $1.1 million interest payment in the next few months, as well as approximately $200,000 tax payment for the years 2008 to 2013. Under GAAP, the income tax impact is recorded in the period of resolution.

Therefore, the results for the second quarter will include a one-time net charge of $2.3 million, reflecting the taxes and interest to be paid, partially offset -- which is partially offset by the reversal of previously accrued tax liabilities and valuation allowances. Of the $2.3 million book charge, approximately $1.6 million relates to taxes and the balance $700,000 to interest.

There are no penalties assessed on MPS. The agreement permits MPS to repatriate approximately $17.4 million of cash from its foreign subsidiary, without any US federal tax consequences other than those summarized above.

I would now like to turn to outlook for the second quarter of 2015. We are forecasting Q2 revenue in the range of $79 million to $83 million.

We also expect the following: non-GAAP gross margin in the range of 54.5% to 55.5%; GAAP gross margin in the range of 53.7% to 54.7%; total stock-based compensation expense of $8.6 million to $9.6 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 in the range of $24.3 million to $25.3 million. This estimate excludes stock compensation and litigation expenses.

Other income to be in the range of $200,000 to $300,000 before foreign exchange gains or losses. Fully diluted shares to be in the range of 40.7 million to 41.1 million shares before share buyback.

In conclusion, MPS continues to execute against its plan and deliver high growth quality revenue. I'll now open the microphone for questions.

(Operator Instructions)

Rick Schafer of Oppenheimer.

Just one quick second. Rick, was the phone line off for a minute during the call?

Yes, it was about one minute, yes. It was just before you give the cash number, Meera.

We can reread it. Reread it again.

Just before your question, I will just go ahead and -- I think we were talking about switching to the bottom line. Let me just repeat that portion.

On a non-GAAP basis, our Q1 net income was $14.9 million, or $0.37 per fully diluted share. This result is computed with an estimated tax rate of 7.5%. Q1 2015 GAAP net income was $6 million, or $0.15 per fully diluted share.

Now, let's look at the balance sheet -- and then we went on to cash, cash equivalents and investments for $279.2 million at the end of the first quarter of 2015, slightly below the $244.1 million at the end of the prior quarter.

And you were live for that, Meera.

Okay. Great.

Congrats on a nice quarter, you guys. I just had a couple of questions.

The first is, maybe you could give us a little bit more color what's behind the spike in inventory as we look at 1Q? Is it supporting a particular product or customer launch? Are you guys seeing any push outs or any order cancels or anything like that?

Sure. If you remember, most of last year, we were carrying inventory at around 130 to 140 days. Inventory last quarter ended up being much lower.

So, for over a quarter we've been ramping up wafers in the foundry, and this is in support of higher revenue in Q2 and Q3. These are all strategic builds that we are doing to support some of our customers and builds we see coming ahead.

Maybe in a related question, I don't know for you or for Michael, Meera. Can you give us a sense of what percent of your revenues last year came from new greenfield products? And what your expectations are for this year and maybe looking forward, in terms of your mix?

If you look at last year, our revenue from new products has been coming up to close to 50% of all our revenues coming from new products. For this year, also, we expect mix to be the same or, perhaps, even a little richer tied to new products.

In general, we released the product and then we see revenues coming about 24 months to 30 months later. So, if you specify what a green product is, these are what we call a green product. This year, last year, as Meera said, it is about 50%, and these are products from four or five years ago.

Got it.

Especially where green [tuned], these are more industrial than telecoms and automotive. The revenue, comes typically about three years. So, this year would be more fruitful than the last couple of years, we see they have a lot more activity, [all of us], three to four years ago.

Okay. Michael, as part of that answer, is there a target mix for you guys, as we look forward the next 12 months, 24 months? In terms of -- do you want your four buckets to be evenly sized in your model, like 25%, 25%, 25%, 25%? I guess, do you see comms and industrial kind of becoming a bigger piece over time?

Our target markets are communications, computing, and industrial. Our we focused on growing those markets as fast as we can. We also recognize there that there is an inherent timing in each of those markets to convert design wins to revenue.

So, as long as we see growth in all of them, as much growth as we can get, then we are happy with it. We don't have a strict number thing. We want to have between 25%, 25%; we don't have anything like that, we just want to see the maximum growth we can in those market segments.

Great. Thanks, guys.

Ross Seymore of Deutsche Bank.

This is actually Matt Diamond on Ross's behalf. I want to segue way to the gross margin line a little bit. The guidance of about 55% is maybe a little -- given the new products -- new product rollouts, it's maybe a little bit less than one might have expected.

I'm curious if that single the change in mix for this year, given that consumer was a little better than expected. Industrial, a little bit worse. Could you reconcile those two dynamics for us?

This is Michael. That signal there, it's really a noise. It's not really a signal.

Clearly aware that the gross margins are in the range. We focus on the top line growth and the bottom line growth.

Okay. I'm sorry. Duly noted. On the buyback, I noticed that there's an extension to the buyback program. Could you remind us how much has been used to date and how much of the authority remains?

Sure. The buyback was originally the $100 million, was authorized through June of this year. Through the end of last quarter, we had brought about $72.2 million.

So, we have $27.8 million to go. This extension allows us to buy according to our algorithm that we have put into place.

Got it. The $17.4 million of cash that could be repatriated, that's certainly a nice boost. Could you give us an idea of how much of your cash is generated domestically and offshore?

We have not in the past shared how much is generated domestically and internationally. But, I can share with you that right now, over half our cash is onshore.

Got it. Thanks so much.

Steve Smigie of Raymond James.

I will add my congratulations on some nice numbers, here. I know you guys just give guidance for the one quarter out.

I think typically you have some good seasonal strength in September, and I was just curious if you could comment on if you are seeing any reason at this point why you wouldn't have some decent seasonal strength into September?

We see the business is normal, and although we give -- we are very cautious for the overall market. Overall, MPS is still a much smaller player. We have a lot of opportunity.

Yes. We always guide conservatively, as you know. We like to hit our numbers.

So, we see the business, a normal macro out there. We see a normal booking pattern. While we can't give any guidance for Q3, I don't see any problems on the horizon.

Okay. Great. Thank you.

You cited that you saw some continued gateway strength. Can you talk a little bit more about -- just give any color more on the data comm? On the boards, we've got pretty substantial dollar content. Was that tracking as you might have hoped, or is that still in process, there?

Yes. On the data comm side, we actually saw our revenue grow from Q4 to Q1. And, the rest of the Gateway business is all opportunity for us. Based on the revenue and the mix, we decide if we want to take more. The telecom side was certainly in a growth phase in Q1.

Great. Fairchild had their earnings call recently, and they talked about picking up some dollar content on the server market as they saw Infineon, International Rectifier merging, which they said created some opportunity for them in the short-term. Is that something you guys could capitalize on, near-term?

I know you'd had some nice product introductions in that area. are we still going to have to wait a little bit for that, still?

In terms of the sever revenue, we've been seeing a ramp in revenues every quarter, and we expect that to continue until it hits -- all of the designs hit their stride. We always -- most of the design wins are done particularly for the Grantley cycle, we are always open to picking up any new business as we see it.

Okay. Great. Last question. In computing, I think you had talked about within your storage products, you are going to introduce some new solutions for SSD, and I think was it was around PCI express. I was wondering if that's still on track at this point?

Yes. We introduced the PMIC for the PCI express last year, and we have design wins and we expecting to have the revenue start in the second half of this year.

Great. Okay.

Thanks very much. Congratulations.

Tore Svanberg of Stifel.

Congratulations on the results. A few questions. First of all, your consumer business was up 20% year-over-year. I know you've had, obviously, your next generation BCD products. If we look at that 20%, how much of that growth is coming from new generation BCD products versus new application penetration?

I think -- I don't have the numbers to quantify exactly which is which. Overall, the growth is some modules business and some other newer products.

These are releases of products -- these products release about a couple of years ago, and as you know, the consumer's always -- you can gain revenue very quickly. This time, we're a lot more pickier and these are revenues that we make sure these are sustainable revenues, and sustainable with the module.

We've also been looking at our revenues. Consumer revenues as a high-value market, and what we saw is a lot of strength in the high-value market.

We also saw pretty good performance in the rest of the more traditional consumer products, as well. So we saw growth in both.

Very good. As we look at the outlook for the June quarter, June quarter is seasonally a strong period for you. Do you expect to see growth in pretty much all the segments? Or are there some puts and takes as far as end markets doing better or, perhaps, worse?

I'll first qualify my answer by saying that we don't have as granular view by all the different end markets as we do when we reach the end of the quarter. But, I can tell you that right now, we expect to see growth in most of the market.

We don't see, at this time, we don't see any difference in all the market segments, MPS percentages very small. There's a lot of opportunity for us to grow, although we can deviate from an impact from a macro market. We are very cautious, and we're very optimistic.

Very good. On the computing side, I recognize the server revenue continues to ramp. But, I know there's also some potential opportunities to gain some share in notebook power management in the second half of this year. Is that still the case? Could you elaborate on that a little bit, please?

In this particular market, we are very optimistic. We released the products, we have a future [cashing], and I think this product we do very well.

In terms of numbers, we have a lot of design options, a lot of -- a lot more design win activities than before. That's including VR 12.5 and VR 13.

That's very encouraging. Last question. If you look at your module business, I know you introduced some new sales strategies there. Is there anything you would like to update us on, as far as your sales infrastructure for your module business?

Let me answer this way, first. Consumer modules always comes in faster. Their product cycles' about a year or two or so.

Industrial, automotive always comes later. This year, we see a lot more activity than in the same period of last year in the industrial and automotive market segments.

Very good. Congratulations, again. Thank you very much.

Anil Doradla of William Blair.

Congrats from my side, too. Michael and Meera, can you help us understand what the end market dynamics and behavior are on the communication side? I know you guys entered into some of the new verticals, so you are a share gainer.

Can you share your thoughts on what you're seeing in China, and some of the -- regarding some of the buildouts -- Xilinx has reported, now they are not in your same bucket, but things are weak on the outlook. Can you tell us what you're seeing on the telecom side?

On the telecom side, we're still very new. If I can tell you, we have a lot of design win activities.

Somewhat even slower than automotive. But very much encouraged by all the design activities from last year and this year.

So, being a new entrant in this market, you're not seeing any kind of soft dynamics out there, that's what I'm hearing? You are just a share gainer there?

Infrastructure side, yes. We are too small to say anything. All I see is opportunity.

Okay. Great. Can you remind us, how much exposure do you have on the PC side and the notebook side?

We have some revenues and we picked up customers, picked up the projects. Really, our customers would appreciate our technology.

So, today, when you say very small, would you say less than 5%, or 5% to 10%? Can you give us some sense?

Yes. Currently, our exposure to the notebook side is definitely less than 5%. Last years cycle, et cetera, we just played in the market very opportunistically. More excited about opportunities this year, as Michael said earlier.

Very good. Meera, you talked about your BCD three, four contributions. Can you give us an update?

Finally, on BCD five, can you share with us some of the end market dynamics, and your lead versus the competition? Thanks a lot.

BCD 4, we still lead by our competitor by a wide margin. The BCD 5, I can tell you this. Stay tuned, now. Our product is about in production.

With regard to BCD 3 and 4, I'd say it's approaching 70% of revenue at this point.

Great. Thanks a lot, guys. Congrats, once again.

Liwen Zhang of Blaylock.

Congratulations, as well. The first question is regarding your industrial segment. March quarter usually is pretty strong for industrial and the automotive.

But I see you had kind of a flattish growth, sequentially. Can you tell me what happened there, and how should I look at it during this quarter?

Industrial? I would say, industrial, we saw strength in power sources, in automotive, and smart meters.

This is a market where -- I mean -- we saw strength in those, and security, which had been on a tear for several quarters, was a little softer, I think, in one quarter. I think it's more a question of customers having bought ahead.

Okay. Got it.

Industrial, overall, could also do very well for us in 2015.

Okay. Thank you. Another question is, if you can give us some updates on your Chengdu testing facility in terms of capacity, utilization rates, as well as, so far, MPS does all the testing internally, or what's the ratio for the internal versus external?

We've been continuing to utilize the test facility in Chengdu very extensively, and we also have some testing done outside, so that there is no limit on our test capacity. We've also taken -- we're also in the process of expanding our foundry capacity by signing on an additional foundry.

Okay.

As you see some of the expenses in bringing up this capacity come on, starting late in Q2 and more into Q3, Q4.

Thanks.

In terms of a percentage, we have 600 products and growing. The utilization and particularly from a percentage of inside and outside, it's typical for us to manage -- spend more money to manage -- spend more money to calculate the percentage than just leaving it as is.

I see. Thanks. My last one, maybe one analyst already asked. But I still want to understand better about your gross margin.

You have more internal testing as a percentage of revenue, as well as your module product ramping up? Which, I believe, even though in the consumer application that you mentioned before, that product line's gross margin will be above corporate averages. Plus, your industrial segment will grow much stronger this year. How shall I think about your gross margin down the road?

All the product -- all the products in the pipeline or just released, they are much higher than corporate average, corporate margin. However, I'll say this: the gross margin is in our models. In this period of time, we should concentrate on the top line growth and the bottom line growth.

Okay. Got it. Thanks.

(Operator Instructions)

Amit Chanda of Wells Fargo.

Congrats on the quarter. I'm just curious, what percentage of your consumer end market revenue is comprised of modules, at the moment?

The modules revenue, we've seen increased revenue every quarter. Right now, it's still a small percentage of our revenue.

Okay. So, do you expect to release the full suite of module products sometime in 2016? Is that your expectation?

In terms of revenue, we will be seeing revenue come from more modules as we go in. We're announcing the revenue from the first few modules that were released over a year ago.

So, I think we already have released something like 12 modules, and then we have a few more that we'll be releasing. So, as more and more of these modules get released, we also see more design wins coming from them, which will set us up for good revenue growth in the quarters ahead.

Okay. Great. As a follow-up, I was just curious for your v-core shipments, what the customer mix is? Is it mostly made up of Asian ODMs, or US-based server OEMs, and how do expect that mix to shake out for the rest of the year?

Most in the US. Some ODM.

Okay. Do expect -- okay. And you expect that similar pattern to remain for the rest of the year?

Rest of the year, yes. For the VR 12.5, and the VR 13 obviously hasn't really started yet. Next year pattern could change it a little bit.

Okay. Great. Thank you very much.

I'm showing no further questions at this time. I'd like to turn the conference back over to Meera Rao for any further remarks.

I'd like to thank you all for joining us for this conference call, and look forward to talking to you again in July at our second quarter conference call. Thank you, and 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.