芯源系統 (MPWR) 2016 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first-quarter 2016 Monolithic Power Systems 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 follow at that time. (Operator Instructions) As a reminder, this call will be recorded.

I would now like to introduce your host for today's conference, Mr. Bernie Blegen, interim Chief Financial Officer. Please go ahead.

Good afternoon and welcome to the first-quarter 2016 Monolithic Power Systems conference call. Michael Hsing, CEO and founder of MPS, is on the call with me today. For those of you who I haven't been introduced to yet, my name is Bernie Blegen. I have been with Monolithic Power Systems now for four and a half years, working largely in the background with Meera as the Corporate Controller. For those of you, again, that I haven't met, I look forward to getting introduced to you in the next quarter or two.

In the course of today's conference call, we will make forward looking statements and projections that involve risk and uncertainties, which could cause results to differ materially from management's current views and expectations. Please refer to the Safe Harbor statement contained in the earnings release published today.

Risks, uncertainties, and other factors that could cause actual results to differ are identified in the Safe Harbor statements contained in the Q1 earnings release and in our SEC filings, including our Form 10-K filed on February 29, 2016, 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 expenses, 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 Q1 2015, Q4 2015, and Q1 2016 releases, 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 over the Internet, and will be available for replay on the 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 $84.5 million. Our first-quarter revenue was on the high end of our guidance, and represented a 14.9% increase from the prior-year quarter. This was our 11th consecutive quarter of double-digit year-over-year revenue growth. This consistent revenue growth is a result of our diversification strategy and investment in targeted market segments.

As we have become established among the first-tier suppliers to the major OEM customers in these new markets, we have encountered even more exciting opportunities that, if we invest now, will enable our growth to accelerate in the next few years. We want to capitalize on these new businesses by investing strategically, while being mindful of the need to operate under a long-term model. These efforts will enhance our market position and accelerate MPS's revenue growth.

Turning back to the financials, this revenue increase over the prior-year was fueled by growth from our industrial, computing, and consumer segment. MPS's non-GAAP gross margin also expanded 20 basis points year-over-year to 55.0%. Looking at revenue growth by market segment, industrial was up 38.3% from 2015. Computing revenue grew 35.2%, and consumer revenue was higher by 7.5%. First-quarter communication revenue fell 2.8% from the prior-year.

Let me speak to the results of each end market. In the industrial market, sales rose to $18.4 million, fueled by product sales for applications in automotive, security, and point-of-sale equipment. Computing revenue increased to $15.4 million, reflecting strength in notebooks, servers and storage. Revenue from consumer markets increased from a year-ago quarter to $33.8 million, driven primarily by gains in high-value consumer markets like home appliances and battery management, as well as in GPS devices.

Communication revenue fell $0.5 million to $16.9 million, largely due to lower wireless revenue. Compared with the prior quarter, Q1 2016 revenue decreased $2.4 million or 2.8% on seasonally lower revenue in the consumer segment, with each of the other three segments improving. Non-GAAP gross margin of 55.0% matched the prior quarter. Non-GAAP operating income was $20.0 million compared with the $22.5 million reported in the prior quarter. Q1 non-GAAP net income was $18.7 million or $0.45 per fully diluted share compared with $0.51 per share in the previous quarter.

Let's review our operating expenses. Our non-GAAP first-quarter 2016 operating expenses were $26.4 million, $1.1 million higher than the $25.3 million we spent in the fourth quarter of 2015, mainly due to increased compensation costs reflecting pay raises, staff additions and higher payroll taxes. Our first-quarter 2016 GAAP operating expenses of $35.1 million matched GAAP operating expenses reported in the fourth quarter.

The difference between non-GAAP operating expenses and GAAP operating expenses for these two quarters is stock compensation expense on an unfunded deferred compensation plan and the write-off of an acquisition earnout liability in Q4 of 2015. Stock comp expense included in operating expenses was $8.5 million in the first quarter, compared with $12.0 million in the prior quarter. This between-quarter decline in stock comp primarily reflected a one-time $2.9 million expense reversal associated with our prior CFO's retirement.

We expect stock comp to normalize once a permanent CFO replacement is in place. Investment expense, related to the deferred comp plan, increased GAAP operating expenses by $157,000 in the first quarter of 2016 compared to $290,000 of expense in the fourth quarter.

Turning to other income, first-quarter non-GAAP other income of $241,000 was $117,000 lower than the prior quarter, primarily due to foreign exchange transaction losses resulting from a weakening of the dollar. Switching to the bottom line, on a non-GAAP basis, our Q1 net income was $18.7 million or $0.45 per fully diluted share. This result is computed with an estimated tax rate of 7.5%. Q1 2016 GAAP net income was $10.6 million or $0.25 per fully diluted share.

Now let's look at the balance sheet. Cash, cash equivalents and investments were $256.9 million at the end of the first quarter of 2016, up $16.6 million from the $240.3 million at the end of the prior quarter. This increase in cash reflected cash flow from operations of $27.1 million, offset by the $8.0 million quarterly dividend payment and the $4.3 million spent on capital equipment and office space. No shares were purchased during the quarter under our stock buyback program.

Q1 cash proceeds from employee stock option exercises and employee stock plan purchases contributed another $1.7 million. Accounts receivable ended the quarter at $28.8 million, down from the $30.8 million at the end of the prior-quarter. Days of sales outstanding were 31 days in both the first quarter of 2016 and in the year-ago quarter, compared with 32 days in the fourth quarter of 2015.

Our internal inventories at the end of the first quarter were $62.3 million, lower than the $63.2 million at the end of the prior quarter. Days of inventory, however, increased slightly to 145 days at the end of Q1 from 144 days at the end of Q4. Inventory in our distribution channel increased from the Q4 2015 level, reflecting the seasonal build. Prior to this, inventory in the channel had declined in each of the three prior quarters.

I would like now to turn to our outlook for the second quarter of 2016. We are forecasting Q2 revenue in the range of $91 million to $95 million. We also expect the following: non-GAAP gross margin will be in the range of 54.6% to 55.6%. GAAP gross margin will be in the range of 53.6% to 54.6%. Total stock-based compensation expense of $10.4 million to $12.4 million, including approximately $400,000 that would be charged to cost of goods sold.

Litigation expenses of $100,000 to $200,000; non-GAAP R&D and SG&A expense to be in the range of $26.1 million to $28.1 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 42.2 million shares before share buyback.

In conclusion, we continue to grow and we continue to invest for further growth. I will now open the phone line for questions.

(Operator Instructions) Tore Svanberg, Stifel.

Congratulations on the results. And Bernie, welcome to these public calls. My first question is on your relative visibility. I know you typically don't give bookings and backlog numbers, but just given all the macro drops -- macro backups out there, how would you classify your current visibility, either sequentially or year-over-year?

Sure. When we look at the backlog going into the quarter as well as the momentum that was carried in from the prior quarter, we feel that we are in comparable shape to -- when we were going into either Q1 of last -- or Q2 of last year or Q1 of this year. So, all in all, I feel we are in pretty good shape.

And --

Very good. And I --

Oh, I was just (multiple speakers) add-on, like I mean, given in the last few years, when we go into quarters and has more and more -- less term business and more and more booked. And although we don't release the numbers, but the train is a very good quarter for our long-term business.

Very good. And my second question is in relation to your communications business. I recognize you are doing exceptionally well in all of the three. Now this one is down year-over-year, but it was up 7% sequentially. So do you think we are starting to see the reversal of the communications business? And if so, what will be driving that?

Let me answer that. Okay, and the short answer is, it is no. Okay, I mean, because a lot of those communication business during the -- in the wireless LAN in the -- that's the -- from the legacy product. And although we are doing pretty well. And those are our business where we are very opportunistic to gain revenues and margin dollars.

And finally, however, we're going to reverse that and it will be an almost sustainable market, I see it in a couple years down the road. We are now releasing the product for telecom market segments. And I really believe these are the winners, and we will take shares in the larger -- this market segment.

Very good. Just one last question for me. Either Michael or Bernie, could you just give us an update on your module business and maybe the programmable module business? I know you probably can't give us any specific numbers, but maybe where some of the design wins are coming, and are you starting to see revenue already in the programmable modules? Or is that a little bit too early? Thank you.

Yes, so I can take the -- some of the numbers there, and then I can defer to Michael as far as the programmable. In general, the modules business is on track with what we were expecting and what we had presented at the Analyst Day earlier. We have introduced a number of products, and we have obtained a number of very positive reviews in several design wins, which are generating good revenue right now, obviously, with the longer-term growth opportunities coming later this year and into 2017.

The programmable modules, as we talked about in the last Analyst call, those are products that -- at the time we talked about it, is about a year, a year and a half away. So we haven't [released] generally any revenue yet but we are starting a sample [rate] in those modules.

And from the last time in the history of MPS, we don't -- we didn't talk about other products until we generate revenue. However, our business model changes and also particular changes in anything where we do now is the effective two or three years later. So in the last year Analyst Day, we've talked about all the products that will generate revenue two or three years down the road.

Sounds good. And congratulations on another stellar quarter. Thank you.

Thank you, Tore.

Rick Schafer, Oppenheimer.

I will add my congratulations to you guys on a nice quarter. A couple questions, I guess. Maybe the first one is, could you give us an update on the progress ramp in your new foundry? And maybe the timing and linearity of the associated expenses, as you talked about a couple -- $2 million or $3 million, I think, Bernie, in incremental expenses? And another question I had on that, is this foundry just going to be for BCD5? Or is it going to run all Monolithic processes?

Thanks for the good words on the quarter. So the progress on the foundry is coming along quite well. In fact, we have already started to take some deliveries of wafer from it. We have several products that are actually in production. We are -- if I could characterize it, probably at about the midpoint of bringing up all the products that we want to, and it is not restricted to only the BCD5, but also, a couple of the earlier versions as well.

Got it. And as a follow-up, what will that bring total wafer capacity up to for you guys, now that you have got the fourth foundry running? I mean, is it going to create any sort of bottlenecks with Chengdu? Or do you just simply outsource that overflow?

We -- and I will answer your second question first -- is that we outsource the overflow. We've been very successful in migrating to that -- adding that into or complementing that as our business model.

And then rather than talk specifically in wafer volume, I think we said in the past that, in terms of revenue with prefabs, we had about -- a little over [100 million] of capacity per quarter, and now we are going up to about [125 million] to [130 million] per quarter.

Yes. And also the overall manufacturer capacities, we are a transfer out in the lower end of product, but those are traditional part of the high-volume. We go to a testing house and offer packaging in a testing, where in-house, they want more developed or more high-end, a very high-quality product. And those are -- we have a much better control -- much worthwhile in the long terms.

Got it. And then just one final one for me. It's on e-Motion, obviously a new product that is kind of changing the way motor makers and system designers are designing products. So, maybe just provide some color or talk about what your go-to-market strategy is with this sort of brand-new product category, if you will, or new product. I mean, it is a $2 billion opportunity or more, I think you've talked about in the past. I mean how do you scale that business, I guess, with limited resources?

It is true. There is limited resources. Like, I mean, but as Bernie said in the script, we are mindfully invested, and not affecting our long-term growth model. But I'm really excited about these technologies. And as you see it, we've generated -- already generate a pretty meaningful revenues from some existing product. And once we put their product in are qualified, and now we are transferring to our own foundry. And the volumes are going to increase part of it.

For however, those products are still in consumers' area, and as expected, and you have a fast ramp, it is always in those consumer areas. And now, the more exciting things is for the future. We change out the way our -- the behavior of designs and behaviors, all these machine designs, these equipment designers, it takes time. And -- but we introduce all these ideas and the product concepts and we are designing, and some of them we are co-designing with all these first-tier customers. And those are -- I am very confident those revenues will come.

Got it. Thanks, guys.

Thanks, Rick.

Ross Seymore, Deutsche Bank.

This is actually Matt Diamond on the line for Ross. Congrats again on the great quarter, and thanks for letting me ask a question. I am curious on the end market breakdown this quarter, was there any one that didn't align with your own expectations? And if it or they didn't, what ramifications those surprises might have for 2Q?

No, no. I think that there were a lot of positives that we take away from this quarter relative to both how we performed in Q4 as well as against our expectations. The growth that we are seeing in industrial in particular, and a lot of that was driven through automotive, but also our high-value opportunities in the power sourcing and in security are ramping very nicely.

And I think going back to the point that we made in the script, is that I think that we have done a good job of being able to get introduced to a lot of high-value opportunities, and now what we want to do is be able to capitalize further to both continue and accelerate that growth. Likewise, when we look at the computing, we saw very good opportunities in the high-end notebook and a continuation of progress in storage as well.

So, in the computing and storage, in fact, it was a pretty balanced approach. We didn't have any categories that fell short of our expectations.

So, when I sum it up, I think we've touched on communications. That went down in Q3 of last year. But as we pointed out, it is trending nicely and we have good opportunities there.

Yes, we don't -- to answer your questions do we have -- expected a gain or a loss -- MPS revenues are very much expected in very stable. And we know in a -- through a few quarters out what gain, what losses, okay? Of course, we do have -- play a lot of opportunistic gains in those traditional legacy product, but we do see and expect other things. As Bernie said it in the script, we encountered a lot of demand for new product from the first-tier OEMs.

Excellent. And just in the second half of the year, as you may have already answered the question, how do you feel about new products heading into the second half of the year? Should there be any expected acceleration there? Or any way to ballpark that would be helpful.

It is pretty much set in our revenues, and we focus on two or three years out. And those customers design it in work with us on those products. And if they don't cancel the product or delay the product, and the revenue is there. And now we don't see a significant difference and it is pretty much as we expected.

Excellent. Thanks so much, guys.

Okay. Thank you.

Thank you.

Steve Smigie, Raymond James.

I will add my congratulations to the good numbers there. Michael, I just wanted to follow up on your answer earlier in the call on communications. You talked about new products coming out. I just couldn't understand. Was that for higher-end communications equipment? Or was that a new set of products for one of the home router type equipment? And is that point of load? Or what type of product would that be that you're -- you think is going to be a pretty good one?

Yes, if we are defending our point of load in home router systems, then it had to be in a lower cost. I mean, and of course we develop those products, we released those products to defend our segment. It's still very good money to be made here. And what I am more excited about is a new line of product. Okay.

As you know, we released very high-powered density product into servers in the computing segment. Those are similar type of products are good for communications. These are for infrastructures. And the servers and infrastructure is somewhat related. And those products we redesigned for the infrastructures. These are products are coming out. That is the kind of product I really talk about.

Okay. Great. That sounds great. On the auto side, any thoughts to what growth might look like for auto now that we're -- for the year, now that we are sort of decently in, and you probably have some good visibility on designs, and what you think auto could potentially grow into 2017?

In autos, and as expected, we said in the last couple years, we see the very consistent growth in the ramp and we don't see any difference. Now the opportunity is we see a lot more now. And we need a lot of more new products for that.

Okay. And do you think that you will keep focused on the areas where you already have success or investment? Or would you move over and start going into power train as well, where I don't think you have any real presence right now?

If I could just throw one last question in. You guys have been investing, you mentioned again here on the press release. Can you talk a little bit about how you see OpEx spending in the back-half of the year? Is it anything different than what you guys have already communicated? Or is it pickup, slow down a little bit from what you were originally thinking? Thanks.

So, as far as -- I will take your first question on automotive, is that certainly being we're such a small component in selling into that, it's a huge market opportunity, that we have tremendous upside, both in terms -- as far as introducing new content to the cars as well as expanding on the designs that we have already had built-in. So, we are very excited about automotive, obviously.

And then as far as like what we are trying to signal as far as the sales and marketing expenses, is that there is just a real opportunity to continue this growth. We have done -- we have already made the investment in R&D as far as the design, process technology, and now the fabs. And so in order to complete the rollout, to be successful, is to invest appropriately in sales and marketing.

Yes. So that is when on the expensive side and we do have to sensibly invest. And we again -- in the last conference call, we talked about we balance our short-term shareholder -- I mean nobody -- I will admit it. We have a short-term investor. If I am a short-term, what that means, okay, for one year or two year guys versus the four or five years guy, we balance those interests. Because whatever we do in this year, there is nothing to do with the revenue generation for next year. So it's two or three years out. So we balance those shareholder interests.

And -- but talk about the powertrain, to answer you very specifically, yes, we are going to get in there. And now before we get in there, we need to put our house in shape for these quality controls, everything. These are very critical components. We need to upgrade our production control.

Okay, great. Congrats again. Thanks, guys.

Quinn Bolton, Needham.

Hey, Michael, I just wanted to follow up on that last question about the long-term opportunities by investing in new products, and sales and marketing today. It sounds like you are not changing your sort of target to grow OpEx at a rate of 50% or 60% of sales. But I just wanted to confirm that.

And second, to the extent that that is still accurate, at what point would you consider making larger investments now? How big would some of those future opportunities be for you to, say, start to spend at a growth rate more than 50% or 60% of sales?

Yes. So that's a very good question. So okay, and when I start talking about investors, investment, everybody got nervous. Okay. Here is the -- we are not going to -- again, here is our long -- this is our long-term target, okay, 50% to 60% of our growth -- of the OpEx growth of our revenue -- from a revenue growth. And we are going to stick with our models.

And we have been one year -- below a little bit, below one year a little bit higher. But I would say the long-term, our long-term is about three, two or three years. And we will be average out with the same in a similar range. We are not going to have big gigantic jump and surprise everybody. We won't do that kind of thing.

Got it, okay. Let me turn it to touch on the e-Motion product. I believe that you were scheduled to be taping out the fully integrated e-Motion part sometime here in the first-half. Just wanted to see if you could give us an update, if that is still on track?

Yes. We have -- actually, well, the product was delayed a little bit and we said it in the release in May, it doesn't look like we will release in May, and we have all the other engineers boggled down over the summer in the details. And okay, well, I think to me these are very minor, okay, things. But however, we are delayed. And then okay -- but the products like we are working with these large customers for very fast revenues, I mean talking about fast revenues, still a year and a year and a half away.

And those products in the engineers want to make final changes for -- to satisfy those large customers ,and I don't have a big argument about it. And those -- however, it is -- we are releasing the product in the next couple of months. And order existing (inaudible) product, as I said earlier, we generate pretty good revenue now.

That's great. And I just had one for Bernie. You mentioned the sales or just the inventory did increase here for the first quarter, for the first time in the last three quarters or the previous three quarters, I should say, were down. Can you give us some sense how much inventory did you build in the first quarter, and any expectations for what just the inventories will do in the second quarter? Is that another quarter, typically when you see the channel build seasonally?

There's two components to that. So, yes, we did experience a dollar increase as far as the inventory in the channel. But as significantly is we are calculating the days off of a lower denominator with the lower revenue. So, in fact, the pattern conformed pretty much to the normal seasonal that we have seen.

For Q2, we are actually going in with the expectation of not increasing the channel inventory in terms of days, keep maintaining those generally about flat, maybe a day increase or so, but we don't expect that to be material.

But on a dollar basis, it probably goes up a touch, just reflecting the higher revenue base?

Yes.

Great. Okay, thank you.

Anil Doradla, William Blair & Company.

Hey, Mike and Bernie. Congrats from my end, too. I had a couple of questions. What was the contribution of automotives during this quarter? Could you give us some sense -- I know you don't break it down, but can you give us some sense what the revenue contribution was?

Yes, I think that what we said in the past is that of the industrial, it comprises about a third of that segment. And now auto starting to increase as a percentage of that segment, as their sales are growing faster than the remainder of that market.

Okay, great. And one for you, Michael. You talked about programmability. It sounds like the revenues would be some time in next year. A couple of questions around that. Is it second-half of next year?

And more importantly, obviously, this is a big important trend within the Power Management sector. Can you talk about the competitive landscape? Are people catching up on the programmable solutions? When do you think competition is going to come in?

I don't see it. And a lot of the people are talking about -- some of the people talk about it and they have a product for the industrial market segment. But these are still very much semiconductor related and are not -- it is a very similar to what they had before. And MPS's product is significantly different and, well, designed for ease of use. And those revenues, I expected, yes, we do see fast revenues in pharma where we release it, and also we had to release it with the softwares and also on the Internet.

So, the revenue contribution, is this going to be more like Q3? Or do you think it's going to be more of a Q2 contribution?

I would say at this time, I would say it looks like the second-half of the year.

Okay, very good. Once again, congrats from my side.

Thank you.

Thanks again.

Tore Svanberg, Stifel.

Looking at the cash flows, I think they were almost at a record level. I was just wondering if there was any sort of one-time items that helped those cash flows? Or should we assume for operating cash flow to hover around 30% of revenue going forward as well?

Yes. There was no one-time item, per se. What we had seen is that working capital in each of the three prior quarters had consumed cash. And in this quarter, it actually turned out to be beneficial, as receivables, in particular, went down.

Very good. And last question on your consumer revenues, so obviously high-value consumer continues to drive the growth there. I was just wondering within Battery Management, how sizable that business is becoming? I believe you said at the last Analyst Day that that would be one of the biggest growth drivers of the consumer business. And I am just trying to understand relatively how big that has gotten now. Thank you.

Yes. So when we look at the Battery Management, currently it is still relatively small relative to the overall opportunity. But it is growing significantly more than any of our other market segments in consumer.

Great, thank you again.

Great. Thank you.

Thank you. And I'm showing no further questions at this time. I would like to turn the call back over to Mr. Bernie Blegen for closing remarks.

Great. Thank you very much. I would like to thank you all for joining us on this conference call, and look forward to talking to you again in July at our second-quarter 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. You may all disconnect. Everyone, have a great day.