芯源系統 (MPWR) 2015 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Monolithic Power Systems, Inc. Q2 2015 earnings conference call. (Operator Instructions). As a reminder, today's conference call is being recorded.

I would now like to turn the conference over to Meera Rao, Chief Financial Officer of Monolithic Power Systems. Please go ahead.

Thank you. Good afternoon, and welcome to the second-quarter 2015 Monolithic Power Systems conference call. Michael Hsing, CEO and Founder of MPS, is with me on today's call.

Over the course of today's conference call, we will make future projections and statements that involve risk and uncertainty which can 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 can cause actual results to differ are identified in the Safe Harbor statements contained in the Q2 earnings release, as well as in our SEC filings, including our Form 10-K filed on March 2, 2015, and our Form 10-Q filed on May 6, 2015, which are all accessible through our website, www.monolithicpower.com.

MPS assumes no obligation to update information provided on today's call.

Today 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.

Included in our earnings release which we have filed with the SEC is a table that outlines a reconciliation between the non-GAAP financial measures and GAAP financial measures. Investors should refer to the Q1 and Q2 releases for 2014 and 2015, as well as the reconciling tables 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 on our website for one year, along with the earnings release filed with the SEC earlier today.

We are pleased to report that MPS again delivered record-breaking quarterly revenue of $84.1 million, representing a 19% increase from the second quarter of 2014. This is the eighth consecutive quarter MPS has achieved double-digit year-over-year revenue growth. In addition, MPS's non-GAAP gross margin expanded 50 basis points year-over-year to 55%. Our non-GAAP operating income of $19.8 million grew 27.6% from a year-ago quarter. And our non-GAAP earnings of $0.46 per share grew 24.3% over the second quarter of 2014.

This strong organic revenue growth is attributable to efforts initiated four years ago. We have since introduced many groundbreaking products in new markets, and consequently we have consistently delivered revenue growth well above industry average.

Four years later, MPS is expanding into a new billion market beside power management. We excited to announce that MPS is introducing a revolutionary family of solutions in advanced motion controls. We are setting a new milestone for the next phase of MPS's growth. We will discuss this new development in detail at our next Analyst Day on September 15.

Turning to the financials, our revenue for the second quarter was $81.4 million, which was above the midpoint of our guidance. Compared with the first quarter of 2015, our revenue increased $7.9 million or 10.7%, primarily due to growth in consumer, industrial, and computing markets.

Looking at our revenue by end market: fueled by higher demand in the security, smart meter, and automotive markets, industrial revenue, which represents 19.9% of our revenue, ramped up $2.9 million from the previous quarter. Consumer revenue grew approximately $4.1 million due to increasing demand from our newer, high-value markets as well as from the markets we have traditionally served. Revenue increased $1.2 million in computing, largely due to strength in the cloud computing and high-end PC market. Communications revenue was relatively flat, due to soft demand.

Moving on to gross margin: our second-quarter non-GAAP gross margin increased to 55% from 54.8% in the prior quarter. On a GAAP basis, our Q2 gross margin was up to 54.2% from 54% in the prior quarter, with the only difference between the GAAP and non-GAAP gross margin being stock comp expense and charges for acquisition-related amortization.

Let's review operating expenses. Our non-GAAP operating expenses for the second quarter of 2015 increased approximately $300,000 to $25 million. In the second quarter, GAAP operating expenses were $34 million compared to $33.8 million in the first quarter. The difference between non-GAAP operating expenses and GAAP operating expenses for these quarters is stock compensation expense as well as expense or income on an unfunded deferred compensation plan.

Stock comp was $9.2 million in Q2 compared to $9 million in the prior quarter. Investment income related to the deferred comp plan of approximately $100,000, decreasing Q2 GAAP operating expenses. In the prior quarter, investment expenses of $200,000 increased GAAP operating expense.

Switching to the bottom line: on a non-GAAP basis, our Q2 net income was $18.8 million, or $0.46 per fully diluted share. This result is computed with an estimated tax rate of 7.5%. Q2 2015 GAAP net income was $7.9 million, or $0.19 per fully diluted share. During Q2, MPS resolved the tax issues arising from the IRS's audit of the 2005 to 2007 tax years. We recorded a net one-time charge of $1.6 million for tax, and $1.1 million in interest related to prior years.

Now let's look at the balance sheet. Cash, cash equivalents, and investments were $236.4 million at the end of the second quarter of 2015, slightly below the $239.2 million at the end of the prior quarter. This reduction in cash was attributable primarily to the $7.7 million we spent to purchase 148,000 shares under our stock buyback program; payment of an $8 million quarterly dividend; and $1.1 million of capital equipment purchases.

In Q2, MPS generated operating cash flow of about $8.7 million. Another $5.4 million was contributed from cash proceeds resulting from the exercise of employee stock options. Accounts receivable ended the second quarter at $26.8 million, up from the $25.3 million at the end of the prior quarter. Days of sales outstanding were 30 days in Q2; one day less than the 31 days reported in Q1 2015.

Our internal inventories at the end of the second quarter were $65 million compared with the $53.4 million at the end of the prior quarter. Days of inventory increased from 144 days at the end of Q1 to 159 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 third quarter of 2015. We expect yet another quarter with record revenue. We are forecasting Q3 revenue in the range of $89 million to $93 million. At the midpoint of the guidance, we are projecting approximately 11.8% growth from the prior quarter.

We also expect the following: non-GAAP gross margin in the range of 54.6% to 55.6%; GAAP gross margin in the range of 53.9% to 54.9%; total stock-based compensation expense of $9.1 million to $9.7 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 in the range of $25.8 million to $26.8 million. This estimate excludes stock compensation and litigation expenses. Other income of $200,000 to $300,000 before foreign exchange gains or losses; fully diluted shares in the range of 40.8 million to 41.4 million shares before share buyback.

Conclusion: MPS continues to deliver. As a reminder, we are hosting our September 15 Analyst Day at our San Jose headquarters. We look forward to sharing our vision of the future at that time.

I will now open the microphone for questions.

(Operator Instructions). Tore Svanberg, Stifel.

Congratulations on the record quarter. A few questions. First of all, just given what's happening out there in the overall environment, could you just talk about your relative visibility going into the September quarter? Obviously there's a lot of share gains going on here. But just how are your customers feeling right now typically at this time of the year?

If you are asking about the softness that some of our peers have talked about, we are seeing some softness in our markets. But what we are also seeing is some of our growth drivers, and we are also seeing new opportunities. And all this, together with our usual conservatism, colors how we look at the quarter.

Very good. (multiple speakers) Go ahead, Michael. Sorry.

As Meera said, the growth is really from a share gain. And to be more precise, or -- it's all the gains are from the new segment that we entered, which wasn't there a few years ago. So the opportunity for us is great. So that's why we see the growth, and we see the growth for the next few quarters.

Very good. And your inventory days ticked up a little bit again. I'm just wondering what's behind that. Is it basically getting ready for this quarter demand? Or is it the beginning of the transition to new foundries? Just trying to understand what's going on there, please. Thanks.

It's a combination. Some of it was in support of the higher shipment this quarter, and also in support of customers demanded a strategic inventory build. And some of it is also we need to hold additional inventory until we get another foundry up and running. So it's a combination of those.

Yes, let me answer a little more -- give a little more color. I am never concerned about MPS's days of inventories. Because first thing, in the history of MPS we never have any large amount of a write-off, because MPS's product last 6 to 8 years. So in history we never -- let's say that we'll never have a material amount, a large amount -- have a material to state it, that we never happened. And we have a very small amount of write-off because -- due to engineering issues related to technical issues.

The reasons -- okay, you see the inventories. Overall in the history, our inventory fluctuation is because, first things, we have a lot of engineering lots and they are ready to take off, and all the customers are waiting. And other reasons of course depend on the demand.

There is a third reason, is that it depends on the pricings. We can use a pricing to book more materials here for the favorite. We book more into the less favorite. We book less. So these are the reasons it's driving the MPS inventory. So I give it as the reason. I'm sorry I gave you just a long, long answer is because I keep hearing our investors ask the MPS inventories.

And okay, may I also just give a -- once more I'll give you all the colors. Okay, what's the reason behind it, MPS inventory?

Yes, that's very helpful, Michael. Just one last question, and I know this is going to be a highlight here in about six weeks. But can you just give us a little bit of a sneak peek on your advanced motion control, new business unit? Just maybe a little bit more information, please?

Yes. We are moving to a new era. MPS always relate to some kind of power. Okay, this one is still related to power, but the more in the motion controls. We are introducing a family that is really software-driven, and to have our customers can much easier to implement on any motions, like a robot. They can really ease of a use, or ease their design activities. And this is not only for a robot; anything motions related, including automotive. And so it will be much easier for them to design.

So we are going to talk about it in the Analyst Day.

That's very, very exciting. Again, congratulations. Very impressive. Thank you very much.

Steve Smigie, Raymond James.

Congrats on a tough environment. Just a few quick ones. Michael, just to clarify, I think what I'm hearing you say, one of the reasons for the inventory is up is that in bad environments like this, you guys can usually get pretty great pricing on wafers, and so you take advantage of that to lock into some lower cost. Is that one of the reasons?

No, no, no. I said the reason we're not disclosing why -- there's a reason that either our demand is high; or, second, we have a lot of new product launching. And the third, okay, we may book -- have a high inventories because it's a favorable pricings. We're not disclosing any of the reasons.

Steve, Michael was just saying historically the reasons why we have held higher inventory, and he included all the reasons. So, favorable wafer pricing is not necessarily the reason why we are doing it now. That's the takeaway.

Okay. And then on the advanced motion control, you mentioned automotive. Would that be for stuff like power braking, power steering? And then could you also use it for stuff like -- seeing some of that used in air-conditioning or other white goods, where you might have a pump or a fan or something like that?

Exactly, exactly -- other. Even in a car, anything moves. In a car seat, wipers, mirrors -- anything moves. Or the brakes, all can use MPS product. It is much easier to use. It's really a new platform.

And the other ones is ACs, anything that's related to -- like an electrical bicycles and anything moves; pumps. And anything with really precise measurements, MPS will be replaced many mechanical parts, and also replace the parts called the encoders -- is an optical device, will be replaced, all of them.

Okay, great. Thanks. And your auto industrial category was pretty healthy there. Can you talk a little bit about what some of your bigger buckets are in auto right now?

Sure. We have four buckets in industrial that are big for us. Automotive being the strongest, and the other three are smart meters, security, and power sources.

Okay. But you're not very strong in, say, LED lighting in the auto, or some other area that we should be thinking about that you guys are dominating in right now?

So, LED lighting, we include a small portion which goes to industrial and commercial in our industrial segment. The rest of it that goes for incandescent bulb replacement, we include that in the consumer segment.

I think Steve's asking for in auto business, right?

This is on auto.

Yes, within the auto business. I think within the auto business is the LEDs, in which we are very strong: a lot of shipments, a lot of design-in activities, a lot of recurring shipments is in the LEDs. In the other one is body -- automotive -- under the hood, is the body. All the DC-to-DCs and -- DC-to-DCs. And these are the product we -- those two category now we ship to our auto business.

Okay, great. And if I could just sneak one last one in. You guys have done extremely well here on the quarter in the guide relative to other folks. But as we look to December, that's typically a seasonally soft quarter for you. Is that -- not to guide the exact amount, but is it fair to think that you would experience typical seasonal softness into December?

We're not usually talking about the next two quarters of our guidance. But I can tell you, there's a significant portion of our business which is still very much affected by the macroeconomic conditions. But overall, the new business segments will grow very strong.

We do know that we'll have some seasonal weakness in Q4 in consumer and consumer-like markets, and we have our growth drivers. But the element we cannot predict, particularly this far ahead, is what the macro conditions are going to be in Q4. And as Michael said, we are not immune to that.

Yes, I'm excited. If we can have a year-over-year in the four quarters of growth; never happened. I expected -- I wish it happened the last years, and it didn't happen. I wish this year.

Okay, great. Thanks a lot, guys. Congrats.

That's a wish.

Anil Doradla, William Blair.

Congrats. I had one big-picture question, then something more specific. Michael, obviously you've been very excited about this motion control, since the acquisition of that small company. But the end markets and applications that you're talking about, when you add them up, we're talking about billions of dollars.

So is it fair to say that -- the addressable market is, what, $4 billion, $5 billion here for you guys? Or are we talking about a very small specific? And when would revenue start coming in from these product lines?

Okay. I'll answer your last question first. The revenue comes in now. It's happening. It's already shipping. But that's based on the product existing when we acquired Sensima. Based on those products, we already generate revenues. It's not a small revenue. It's meaningful to our revenue in either.

And to answer the other part of how big -- the large market segments, it is certainly well over several billions, or over $1 billion or $2 billion. Whether it's $4 billion or $5 billion, we don't know yet, because the end market is growing very rapidly.

And I think it's from Internet of Things and now that connect to a phone. Now, the next explosions of demand is that you do something; do something, and that you need an automatic control. Those are really demand. I see a lot of activities out there. There's a lot of small companies that are doing these kind of things. This products are perfect for it. There's a product of a family is provides a platform for that kind of implementation.

Amazing. Now, Michael, clearly you are very bullish. And I think from day one, you were very bullish with this very promising product line. So, why shouldn't I think of this segment being the next $500 million revenue? This should happen very quickly, given that no one is there. Obviously there's going to be some switching costs. But if there -- you're talking about these new applications, new end markets, and it's going to be the way you're talking about -- this could itself power the Company to double the revenues of where they are today, right?

Absolutely. The limiting factor is our sales and marketing now. And it's all possible. I think of the $500 million, yes, I see much bigger growth on that.

Well. And finally, Michael, you talked a little bit about pricing power. Can you help us understand what position Monolithic Power is in today, given that the modules are finally kicking in with some of these end markets, such as you talked about -- automotive and industrial.

How is that affecting the overall pricing environment, from your point of view? Is it significantly better than historical levels, or it's getting offset by consumer? And how should we be looking at your pricing power?

Well, our pricing power is the more -- more as a solution providers, the more we can charge more. In the last four or five years, our -- the level of integrations, and also on top of it and have a softwares. That really gain us our pricing powers. And even in the consumer market segments -- and we're doing really well. Our customers appreciate those ease-of-use products.

Very good. Congrats on the results, and we look forward to the Analyst Day.

Ross Seymore, Deutsche Bank.

I also want to echo the congrats. Thanks for letting me ask a question. Michael, you mentioned before that market share gains were really the driver to allow Monolithic Power to offset what's going on in macro. Can you talk a little bit, either you or Meera, about where you think those market share gains, by end markets, are the most apparent for this year and maybe into next year?

And then as a follow-on for Meera on that: for the side of the business that you are saying the weakness on, what are you doing to encapsulate some conservatism into your model and into your guidance, given what we've heard from everyone else?

Let me answer first. Of course I was talking about motion controls, and I'm all excited about motion controls. That's in the future. And Meera can talk about what has been growing for the last months or so -- last few quarters or so.

Okay. The areas where we see growth this year are some of the same markets we've been talking about. We have seen growth in our industrial markets. We expect to continue to see that. Consumer, again, it's a newer market to a large extent. It's a high-value market opportunity that we talk about, where we are seeing strength. And computing -- when it comes to computing, it's both storage as well as cloud computing where we are seeing strength.

So, on top of all this, and as you roll on into next year and everything, we are in the early innings of modules, for example. Now we expect to get a few million dollars this year, but as we go on to next year and the year after, we expect to see a lot more revenue there. So, that answers the question of where we are seeing our growth.

And in terms of where we are seeing some of the weakness, we are seeing pockets of weakness in areas like our gateway communications business, we are seeing some. We are seeing some softness in more traditional consumer market. And so we have factored that in into our guidance. And as you know, we have a track record of hitting our guidance. We sit and put a lot of thought and effort into making sure that we are comfortable with the numbers that we guide the Street.

Great. That's perfect. As my one follow-up, on the OpEx side of the equation, you've talked about that being elevated for some period of time, as you bring up your fourth foundry. Can you just give us a rough idea of how much of your current spend is targeted towards that? And is that something that's a permanent step up, and then you grow into it as that foundry ramps? Or is it something that's temporary, and then will fall off after a period of time?

Currently, we have started some of the work on bringing up the new foundry from the standpoint of mask sets, et cetera. But this quarter we just had a small portion of it in Q2. And you're going to see more of a stepped-up cost in Q3, Q4, going into the first half of next year. And the rough estimate is, between these four quarters, we will spend something -- maybe just a little under $3 million on the mask sets. And then the rest of the increase this quarter is obviously for some of the sales and marketing that we need to -- the people we need to hire in support of growth in newer markets.

Yes, let me talk about OpEx. I don't imply MPS will grow tremendously in OpEx. Look at the histories. We always grow less than the revenue growth in the history of MPS. In some years it goes up a little bit higher than others. If you look in the last four years, and I would expect the next four years it would be at similar levels, and plus/minus. But overall, I said it earlier, MPS's growth is limited by our sales and marketing.

The reason I said I can get into it a little more. Four years ago, we tried to enter these new markets segment, so we are knocking on the door for about two years. Then four years later, we see the doors are open; we're in it. And we see a lot more opportunity, and we can grow. But we still want to grow very manageable, within the same pattern as in the last four years.

Great. Thank you very much. Congrats again.

Rick Schafer, Oppenheimer.

I'll add my congratulations on another nice quarter. You guys continue to do great just in general, I think, compared to some others in your peer group. I'm just trying to quantify great. For instance, you talked about automotive. I think automotive revenues doubling or potentially doubling annually for you guys over the next few years, which would give us a line of sight to that automotive business being something like a $100 million business in the next 3 to 4 years, potentially.

Are there other opportunities out there? I'm guessing that E-motion could be another one of those categories. But are there other opportunities like automotive that you can lay out for us, so we can get a sense of some of these bigger pieces of the pie and how they are going to ramp over the next -- like I say, three, four years?

I think the E-motion is across the board. And also some of the new emerging market segments, so it's big enough there. For all our business -- so you said $100 million, I don't know about $100 million. But in the last few years, where we would grow 100% -- we've doubled it every year, is because we're small. And going next couple of years, and the two years out, I don't know if we can still can double it. That would be a lot more difficult. But E-motion size, it's -- so far, the sky is the limit.

Okay. And since you mentioned it, how far out is the -- if you want to call it the tipping point -- but how far out is that business from hitting that tipping point, the E-motion piece? Is that -- and maybe I'll define that as maybe a 10% revenue driver; 10% of business, kind of business.

I think it's -- on the consumer side, like a drone. We can generate revenue very quickly. I see a lot of emerging market, like a robot, in artificial intelligence in a driver -- a robot driven by artificial intelligence. Those are emerging. And I think as I truly believe there were more and more. These are all coming. And for 10% of MPS revenues, MPS also growing. And I think as we're going to -- in the next three or four years, I think that we are going to be -- we'll be more than MPS -- 10% of our MPS revenue.

Got it. And then just if I squeak one last one in, just on V-Core. We talked about the V-Core ramp in the second half, and for you guys. And I guess maybe how much does V-Core content really go up with Skylake, in your eyes? And how big can this business be for you guys here in the second half? And that's it. Thanks.

So, Skylake, that's mainly into the notebook business. While Skylake is more interesting than the cycles that have come before, we still tend to view this more opportunistically, because our strategic focus continues to be on servers. We do believe that this is going to be a stronger cycle, and we'll only play in the high end of the PC business.

Okay, thanks.

David Wong, Wells Fargo.

Can you give us some idea of where the growth in consumer is coming from? This is one of your biggest divisions, which has been growing at 20%-plus year-over-year. So have you gone into some new segments? Do you have new products in particular applications? What is the biggest driver in this segment?

These are four new markets that we have entered in the last few years that we call our high-value market segments. And that's where we are seeing most of our growth in consumer, is coming from these. And just to remind you, these are home appliances; these are battery management, LED lighting, as well as gaming. So these are the four markets that we are seeing most of our growth in consumer.

Great, thanks.

(Operator Instructions). Lena Zhang, Blaylock.

Congratulations as well. You guys keep just surprising the Street. So, I have one puzzle in my mind. Given strong growth in the top line, as well as the industry grow most; and also, Michael, you mentioned the favorable pricing from foundries. So, it seems like gross margin expansion is kind of a --.

No, no, no. Let me break you. No, no, no, let me break you first. We have not -- increase of inventory is not because we have a favorable pricing. I didn't say that. Okay? I didn't say that.

I know. I know.

It has historically been one of the reasons in some of the prior growth, not this one. So, just to make that clear.

All right, yes. Sorry.

I understand. Thanks for the clarification. But you look at your top-line growth, very strong, especially in this kind of tough market environment. And you look at your industry growth: it's almost more than 30% growth year-over-year, in at least the last six quarters.

So my puzzle is, it seems gross margin expansion is kind of behind than these kind of two strong growths. Or you can help me to give me the factors to -- in your gross margin -- factors into decide your gross margins.

It's very simple. As we have said before, as we see more and more revenue come from higher-margin opportunities, we also take more of the lower-margin revenue. And these are in markets like some of our traditional consumer markets, or it could be in the gateway business in communications, or sometimes even in notebook. And these are opportunities where, as we get more of the higher-margin revenue, we do take that.

So the idea is, if you look at our long-term model, our gross margin is well within that at the 55% level. And so we actually optimize our top line and bottom line more. (multiple speakers).

Showing a steady expansion in gross margin; and we've always talked about the gross margin expansion as a steady growth. It's not a race.

Okay. Thanks. And also in terms of your new product line, motion control, I know Mike did mention that down the road it will be about 10% of total revenue. So, should we expect that you will give us a breakdown when it reaches a certain amount of revenue?

When it reaches a material amount of revenue, we would most probably consider breaking it out. But we are not at that point yet.

Okay. Thank you, and a best of luck of that. Thanks.

Thank you. And I'm showing no further questions at this time.

I'd like to turn the conference back over to Meera Rao for closing remarks.

Thank you, Candace. We'd like to welcome you all to come and attend our Analyst Day that's going to be on September 15 at our headquarters in San Jose. It will be at 9 AM California time or noon East Coast time. And we'd love to have you all come and attend, where we can share with you how MPS is going to grow in the years to come. Thank you. Bye-bye.

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