芯源系統 (MPWR) 2015 Q4 法說會逐字稿

Good day, ladies and gentlemen. And welcome to the Monolithic Power Systems Q4 2015 earnings conference call. At this time all participants are in a listen-only mode. Later we will conduct a question and answer session and instructions will be given at that time. (Operator Instructions). As a reminder, today's conference is being recorded. I would now like to introduce your host for today's conference, Ms. Meera Rao, Chief Financial Officer. Ma'am, please go ahead.

Thank you.

Good afternoon, and welcome to the fourth quarter and fiscal year 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 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, as well as in our SEC filings, including our Form 10-K filed on March 2, 2015, and a Form 10-Q filed on October 28, 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, 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, measure the financial performance prepared in accordance with GAAP. A table that outlines the reconciliation between the non-GAAP financial measures and GAAP financial measures is included in our earnings release which we have filed with the SEC.

Investors should refer to the Q1 through Q4 releases for both 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 web cast 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.

Let's begin with a summary of 2015. We continue to perform as we have in the past few years. We are pleased to announce record annual revenue of $333.1 million. Our full year organic revenue growth of 17.9% clearly out performed the analog industry which SIA estimates grew 1.9% over the prior year. For 2015, MPS' non-GAAP gross margin expanded 40 basis points from the prior year to 55%. Further, our non-GAAP operating income grew to $81.7 million, representing a 34.8% increase over 2014 after excluding the one-time $9.5 million litigation judgment received in the prior year. We achieved record non-GAAP EPS of $1.89, 32% over 2014, again, excluding the litigation judgment.

Diving into year-over-year revenue growth by market segment; industrial was up 35.3%, storage and computing revenue grew 22.6% and consumer also increased 18.2% over 2014. Let me speak to the results of each end market. In industrial and automotive market sales rose to $66.3 million fueled by product sales for applications in automotive, smart meters, security and power sources. We are thrilled that industrial revenue as a percentage of total revenue surged from 6.7% in 2011 to 19.9% in 2015.

With significant design win momentum in industrial and automotive we expect to see continued growth in 2016 and beyond. Revenue from consumer markets increased to $145.1 million, driven primarily by high value consumer markets like battery management, home appliances, gaming and LED lighting. Computing revenue was up $10.5 million from the prior year to $56.6 million mainly due to growth in cloud computing, high end PCs and storage. Communications revenue grew slightly to $65.1 million compared to $64.6 million in 2014. Growth in networking and telecom was partially offset by a decline in the traditional gateway business.

Switching to Q4. MPS had a record fourth quarter with revenue of $86.9 million, representing year-over-year growth of 14.8%. This is our tenth consecutive quarter of double digit year-over-year quarterly revenue growth. Non-GAAP gross margin was 55%. 10 basis points lower than the prior quarter but 10 basis points higher than the fourth quarter from a year ago. Our non-GAAP operating income was $22.5 million compared to the $23.8 million reported in the prior quarter and $18.3 million reported in the fourth quarter of 2014. Q4 non-GAAP net income was $21.1 million, or $0.51 per fully diluted share, compared with $0.55 per share in the previous quarter and $0.43 per share in the fourth quarter of 2014.

Let's review our operating expenses. Our non-GAAP fourth quarter 2015 operating expenses were $25.3 million down from the $26.5 million we spent in the third quarter. Our Q4 expenses were below expectations primarily due to new product costs being delayed to Q1 2016. We have also begun investing in our infrastructure as an industrial and automotive market opportunity continues to grow. Our GAAP operating expenses were $35.1 million in the fourth quarter, compared with $36.1 million in the third quarter.

The differences between non-GAAP operating expenses and GAAP operating expenses for these quarters are stock compensation expense, income or loss on non-funded deferred compensation plan as well as a write off of an acquisition earn out (inaudible) in Q4. Stock comp expense was $12 million in the fourth quarter compared with $10.2 million in the prior quarter. Since 2014, we have implemented pay for performance equity programs. This increase in expense is due to MPS' revenue performing better than expected compared to the analog industry during this period. Q4 GAAP operating expense also included a $2.5 million credit resulting from an acquisition related earn out liability.

In addition, Q4 GAAP operating expense included $300,000 of investment expense related to an unfunded deferred compensation plan compared to an investment gain of $500,000 in the prior quarter. Switching to the bottom line. On a non-GAAP basis our Q4 net income was $21.1 million, or $0.51 per fully diluted share. This result is computed with an estimated tax rate of 7.5%. Q4 2015 GAAP net income was $10.1 million, or $0.24 per fully diluted share.

Now let's look at the balance sheet. Cash, cash equivalents and investments were $240.3 million at the end of the fourth quarter of 2015. Above the $235 million at the end of the prior quarter. In Q4, MPS generated operating cash flow of about $21.7 million. Cash proceeds from employee stock option exercises contributed another $900,000. These cash inflows are partially offset by $8.6 million to purchase office space and capital equipment. In Q4, we funded the $8.1 million quarterly dividend declared in the prior quarter. We also spent about $600,000 to purchase 11,000 shares under our stock buy-back program.

Accounts receivable ended the fourth quarter at $30.8 million, slightly higher than the $30.5 million at the end of the prior quarter due to higher sales in the third month of Q4 compared with the prior quarter. Days of sales outstanding we are up to 32 days in the fourth quarter from the 30 days in the prior quarter, and the 31 days in the year-ago quarter.

Internal revenues at the end of the fourth quarter was $63.2 million down from the $67.3 million at the end of the prior quarter. Days of inventory decreased to 144 days at the end of Q4 from the 147 days at the end of Q3. Days of inventory in the distributed channel decreased for the third consecutive quarter.

I would now like to turn to outlook for the first quarter of 2016. We are forecasting Q1 revenue in the range of $81 million to $85 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 53.5% to 54.5%. Total stock based compensation expense of $11 million to $13 million including approximately $350,000 that would be charged to cost of goods sold. Litigation expenses of $150,000 to $250,000. Non-GAAP R&D and SG&A expense to be in the range of $25.4 million to $26.4 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 to be in the range of 41.2 million to 42 million shares before share buy-back. Sorry. Fully diluted shares to be in the range of 41.2 to 42.2 million shares before share buy-back. Our Board has approved a $50 million stock buy-back program over a one year period beginning this quarter.

We are pleased to report that we have achieved all of the share price targets that were set for the 2013 MSU program. Accordingly, at the end of 2015 we established another MSU program with a new set of share price targets which includes an initial range from $71.36 to $95.57. The program spans six years with a full year performance period. In conclusion, in 2015, we continued to deliver and we great expectations for the future. I will now open the microphone for questions.

(Operator Instructions). Our first question comes from the line of Anil Doradla, from William Blair & Company.

Hi, this is Joe Hodes in for Anil. Congratulations on another great quarter. I'm wondering if you can give us any more color regarding the industrial segment? Given some weakness we're seeing in the overall environment? In other words, what products are driving your success and how much of that is automotive? Thanks.

We are not seeing any particular weakness. And if you look at our trend, even last year, we didn't see much weakness in Q4. And this is a quarter where we continued to see momentum in industrial areas including automotive. And one thing to keep in mind is these are all early revenues. We are not a big player yet so if there is any macro, or weakness playing in automotive you wouldn't expect to see it in our numbers.

Okay. Thank you. Okay. And then moving to new products. What can we expect from the brushless motion control in 2016?

We have a lot of design win activities and we have some small in terms of revenue, will have some revenues but we expect to have in 2017 and beyond the product with accelerated growth.

So late 2016 probably?

Yes, even starting now we have revenue.

Okay. All right. Great. Thank you.

Our next question comes from the line of Rick Schafer, with Oppenheimer. Your line is now open.

Thanks, and congrats on a nice quarter you guys. It's tough out there.

Thank you.

I have got a question on your auto business. I think you have seen your auto business double annually for the last couple of years. What does that trajectory look like this year? Can we kind of stay on that same kind of slope? And maybe part of that question is; Is this auto growth primarily going to be coming from infotainment where you guys are strong now or coming from a combination of areas? Are you going to be ramping in areas like drive train or A-DAS or other areas within the auto?

Yes, Rick, thanks for that comment. And the growth in the automotive is a pretty consistent because unless the auto companies cancel the design of the car, okay, cancel the entire project, that doesn't happen very often. So we have many design wins and it started a couple of years ago. And also with the right product and particularly for design for automotives we are very optimistic for the next few years.

And the related to what kind of a product, what kind of application in the car, we are, accepted in the engine, accepted under the hood, we are almost everywhere now. Meera? Did you have something?

That was my point basically that except for the power train that we started in infotainment but then they've gone into the body, into safety, into various different applications.

Got it. And by region is there anything, I mean I know you guys are strong in Europe, have you seen looking at your backlog, like you said, Michael, you have got good visibility there. Are you starting to see areas like Japan or North America or any other place start to pick up?

North America, China, Korea are definitely picking up. Other than Japan. Japan we have some. And they are much slower than any other region. It is not because the market segments, it is because MPS sales people. We already corrected that two years ago.

Got it. Got it. And then my second question is on E-motion. I'm curious what milestones we should be looking at? Or this year, it sounds like revenues will be pretty small but I guess maybe my real question is what is sort of the biggest hurdle to that business ramping? I think we've talked about it being a $2 billion or greater TAM. Is the biggest hurdle just scale or would you ever license that IP or would you ever think you need a partner to ramp that business? If you could give us some color on what that business looks like in the next year or two?

Next couple years still we will see a slow growth and accelerating after probably 2017 or so. And all of these things we are talking about really changing how you design the, how do you control the motion, how do you design the Moto driver. And these ones is really a long-term and MPS doesn't focus on a short-term business. If anything, goes up fast and it comes down fast. We focus on these longer terms in the sustainable market segments. And so far, there's no surprises and everything's follow the plan. And everything's executed well. So we generate with revenues from some strategic customers and then we work with them closely. And the larger market segments will, or revenue will come in 2017.

Michael, would it mean anything to think about like what your two or three year backlog is with that business? Or is it just way too soon to think of it that way?

No. It is not. We focus on that, as we said. Industrial robot in that segment is growing and also the very mature market is the printer market. Using our technology can revolutionize the printing, the way printing. Not only in the office paper printing, also textiles and fabrics and photos, all of these, it can increase the speeds just dramatically. And these are the market TAMS is easily is over a billion dollars. Okay. Just for the printing segment.

Got it. Got it. Thanks a lot.

Okay.

Our next question comes from the line of Tore Svanberg, with Stifel. Your line is now open.

Thank you and congratulations on the results. A few questions first of all, I know you typically don't discuss backlogs or bookings or anything like that but could you just talk about your relative visibility now versus perhaps a year ago?

I think our visibility now is the same as it was about a year ago. We had good bookings coming into the quarter, continue to see orders, we had good resale's last quarter. So we are actually seeing good activity from a backlog standpoint.

You cover us for many years. And well, since the beginning. And you know that our turns of business it as less and less. And especially in the last couple of years, okay? Where going through the quarters now is much more predictable now.

Yes. Which I think also explains the very consistent performance for the last few years. My second question has to do with SSD. How will that play out for you this year? I know last year that was a pretty strong business for you. I assume now we have crossed over SSD versus HDD as far as your revenue?

The SSD, we have all of the designs that we have, there's additional sockets with the existing customers and we have a new customer who started buying SSD products last year. So with all that, we do expect SSD to continue to grow. And, yes, SSD has crossed over HDD at this point.

And moving on to the server business, I know Grantley, VR12.5 and also Purley are going to be strong catalysts for you. Any updates there as far as timing is concerned?

I think you know, to ramp up, all right.

Purley is Q3, Q4 of 2017.

Yes.

And as far as I know that schedule is still on. The design cycle for Purley is still going on and as we told you at the analyst day, we are seeing a very good progress over there. Much stronger in Purley than we were in Grantley.

All of these cycle were designed a couple of years ago and nothing has changed and they are just waiting for the cycles to begin. But more exciting thing is that we gained a lot more socket and we're established as a player in that segment.

Great. Just one last question for me. On battery management I know you have a single chip solution there and you have already gotten some good traction but any new applications that you can share with us that you have penetrated with your single chip solution for battery management?

Well, we have a lot of things going on, but the one in analog stage that really pay attention to it hasn't released it yet and we are still working on it. But everything else is just normal.

Okay. I did have one last question. Could you just clarify a little bit what you said about the stock option program especially on the pricing?

Sure. We had an MSU plan that had been set before that had price targets that ranged from $43 I think $40 to $56 and since we have achieved the price targets we now have a new program and the initial range of target prices is $71.36 to $95.57. So there is a four year performance period for this and then between vesting and sales restrictions, it extends another two years.

This was just an update to the older version?

Conceptually. It a new plan but yet it is not an extension but it is a new plan.

Got it. Thank you so much, guys.

Thank you.

The next question from the line of Quinn Bolton, from Needham & Company. Your line is open.

Just a follow up on Tore's last question there. In that restricted stock plan, does the stock have to hit those levels for those RSUs to vest or to be awarded?

Yes. They have to be at that I think for an average of 20 trading days, consecutive trading days for it to be earned. Even if it is earned it doesn't vest until the fifth and sixth year.

Okay.

There are Operational goals as well. This time there are operational goals in addition to the price targets that have to be met.

The first how we set it up, I know, Quinn, you just covered us not very long ago. We had a program during the close at $30 level and we set up the programs for some $40 to high $50's. And that program had only one measurement and it is the stock price. When the stock hit then we have some period of vesting. And now this time we have a similar program and they are using stock price as one element but we also added the performance element to it.

Understood. Just trying to confirm that you were aligning management employees, RSU's, with shareholders and that the stock has to go up for the RSU's to vest or to be earned?

Absolutely.

Absolutely.

That is what I was trying to confirm, okay, great. And I apologize because I missed some of the prepared comments but it looks like the computing or storage computing was probably down by the greatest percentage sequentially. I know you had a very strong third quarter which I think reflected the ramp of a new SSD program. Should we think December as coming back to more of a normal run rate or is there something in particular that happened in storage and computing in the December quarter?

If you remember the beginning at the last earnings call we called out the fact that we were seeing some weakness in the SSD and we had expected to see some seasonal decline in the SSD for client, but we had also seen a softness in demand both HDD and SSD enterprise. I think it is more a reflection of what was happening in the macro and how it impacted some of our customers in those markets.

Based on answers to some of the earlier questions sounds like the backlog and bookings activity has been fairly healthy, didn't sound like you were seeing much impact from weaker macro economic conditions. Is that storage and the HDD/SSD comments really the only place where you've seen any impact from macro economic conditions on the business?

That is the only one that I could see anything clearly. The rest of it, we are listening more to what our peers have to say about macro because we are still seeing good bookings and billings.

Got it. Great. You have a lot of longer term drivers in E-motion and early ramps that really started to kick into more significant revenue contributors in 2017 and beyond. If you look at 2016 can you sort of list for us on a product basis maybe the top two or three growth drivers would be for 2016, again, from a product perspective?

Sure.

I can comment on it. And this year 2016 revenue especially all these growth drivers. And these products all released about two years, two or three years ago. One is obviously in the auto segment. And the other one the cloud computing, the high end computing. That's including some work stations and high end notebooks and also the servers and the data centers. And other ones are industrial. Is it Meera? Is not as good as the last year's. Similar, right?

Industrial is going to be doing very well.

Yes. And so we have many, actually. So and we have many segments. What else, other, the consumer side, the high end consumer business. And we released a lot of product before for mobile and for ultra-low power application. And also a variety of product for the internet of things but seems now nobody talk about anymore. Those product actually we started to do in the 2011. Those products are actually doing really well now because we see many application in the connectivities and requires those product. And this year we are doing really well. Any other segment I forgot?

The three I would emphasize would we Industrial, Storage and Cloud Computing and Consumer, particularly the high end consumer.

Also, Auto. Right?

Auto is included in industrial.

Okay.

Last question. On the high value consumer I think last quarter you said that that was approaching 40% of the total consumer bucket. Did that reach 40% or has that continued to increase here in the December quarter and as you look into the March quarter?

I don't know that the percentage of total revenue, I don't know what the number is because all of the segment, other segment will grow faster and Consumer probably grows the slowest. Revenue wise I don't see what decreased. We continue to grow.

Year-over-year the high value consumer is continuing to be a bigger portion of our consumer revenues. But if you're comparing quarter over quarter, since Q3 was much stronger seasonally for consumer, that would impact our high value consumer revenue as well. But year-over-year what we are seeing is even if you look at a quarter year-over-year, we are seeing bigger portions of consumer revenue coming from the high value consumer market.

Okay. So you continue to mix to the high value consumer is what I was trying to get at?

Yes.

Yes.

Thank you.

Both, yes.

Our next question comes from the line of Ross Seymour, with Deutsche Bank. Your line is now open.

This is actually Matt Diamond on Ross' behalf. Thanks for letting me ask a question. Your coms business has upsided really nicely, it seems. I want to get your thoughts on the stability of the coms market. We've heard from some of your peers that things seem to be stabilizing and I want to get your thoughts for what to potentially expect for the first quarter and beyond?

In coms, I would say networking and telecom was relatively flat with the prior quarter. Most of upside that we saw was in the gateway business where a quarter before we had seen weakness. So if I look out into Q1, I expect from a networking and telecom it will be flat, and Q1 on the gateway business it depends on how the macro plays out.

If you remember, the gateway is an area where it's not a strategic focus. It's something that we play opportunistically depending upon the margins for the orders that we receive. My expectations is that the gateway business is going to be flat and maybe even slightly down.

Understood. You mentioned about new product costs being pushed out to the first quarter. I don't want to make you guide beyond the first quarter but directionally is there anything abnormal or irregular to call out about OpEx for the rest of 2016?

Remember we had been talking about the new foundry that is coming up and we'd identified the cost of bringing up the new foundry at $3 million. This is between the mask set costs as well as the wafer development costs, and we ended up spending only about a $0.5 million dollars in 2015 so we will be spending about $2.5 million in 2016 on that. The other thing that we also commented is that we have begun our investments in Industrial and automotive markets so that is going to be something that going to be driving OpEx expenses this year.

Great.

Let me comment on the expense side. It is clearly, we have a very outstanding product for automotive and industrial. Our quality is exceptional. However, we need investment in the systems. In the quality systems and MPS just have those products just by brilliant design engineers and our peoples. Now, we need to invest in the infrastructures. And there is a lot to be done in there which will overall elevate the Company's quality.

And so in 2016, it is time we should do that. But depend on how much? How much is really depending what MPS' growth rate. And during the Analyst Day last year and I said that with our OpEx always grows a little more than half of what the revenue grows. So this years would be just slightly higher and also we are really controlled depending on the revenue growth.

Just a reminder we talked about our OpEx growth rate would be 50% to 60% of the revenue growth rate and while we expect to be higher this year that does not include the new product cost for the new foundry coming up.

Got it. Makes total sense. Thanks very much. I appreciate the clarity.

You're welcome.

The next question from the line of Steve Smigie, with Raymond James.

Thanks. This is Vince Celentano on for Steve. I saw that your LED business looks like it's up almost 20% year-over-year in the quarter. Can you talk about what has led to the out performance so far and where you see that market going in 2016?

If you see the fast trending products, we are very opportunistic. May be more or may be less. These are not our core interest. We do have, I underline, a very solid LED product customers. These are really for the decorating lighting, industrial lighting. If you have a fast-growing revenue we are very opportunistic to take those revenues if we have the capacity.

Okay. Great. Thanks. And then do you have any color on upcoming BCD-5 as far as how compared to the BCD-4 in performance or do they target different applications? And then more broadly, how do you see BCD, as far as how it compares to a competing solutions?

Well, competing with a competing solution, I don't see anybody that has anything close to what MPS had. We are leading by far. In the past few years, a couple of years, it has been much further now. And so BCD-5's and we have first a few products and we are launching now with all of the programmable features in it.

One of the key things I would also add, while BCD-5 that makes it special, is that we've also added memory and digital capability.

Great, that's very helpful, thank you.

(Operator Instructions). Your next question comes from the line of David Wong, with Wells Fargo. Your line is now open.

Thanks very much. Just a clarification on your answer. You noted slight growth in communications for the full year 2015 but communications revenues, if I calculate correctly, was down about 10% year-over-year in the second half of the year. Was all this driven by declines in the traditional gateway or did telecom and networking or any other sub-segments of coms also drop in the second half?

I wish we have all of the other infrastructure business. We don't have that much.

Also, to add to that, the networking and telecom area has been doing well right through the year. So the weakness in the second half was more attributable to the gateway business which is an area, like I said, we only play it opportunistically, if the prices are attractive then we will take that business. Otherwise, we may not take it in a particular period.

Okay, great. Thanks.

And I'm showing no further questions on the phone lines at this time. I would like to turn the call back to Meera Rao, for closing remarks.

Thank you all for joining us on this call and look forward to talking to you at the Q1 earnings call. Have a nice day. Bye bye.

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