芯源系統 (MPWR) 2016 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Monolithic Power Systems third-quarter 2016 earnings conference call. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to hand the floor over to Bernie Blegen, Chief Financial Officer. Please go ahead.

Thank you, Karen. Good afternoon and welcome to the third-quarter 2016 Monolithic Power Systems conference 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 Q3 earnings release and in our SEC filings, including 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 expense, operating income, interest, and other income, net income, and earnings on both a GAAP and on 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 Q3 2015, Q2 2016, and Q3 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 live over the Internet and will be available for replay on our website for one year, along with earnings releases filed with the SEC earlier today.

Revenue for the third quarter was $106.5 million, up 16.7% from a year ago. Non-GAAP gross margin of 55.3% was 20 basis points higher than the prior year, and non-GAAP operating income was $29.4 million, up 24% year over year. Our growth in third-quarter revenue over the prior year was due primarily to a 30% gain in computing and storage revenue and continued growth in our industrial market segment where revenue increased 22.8%. In our computing segment, revenue increased to $23.5 million compared with the $18.0 million reported in the prior year, reflecting strength in high performance notebooks and servers.

In our computing and storage market segment, much of the revenue increase is attributable to market validation of our power management solutions based on MPS's digitally designed Quantum State Modulation or QS Mod. Digital design allows our power management module to deliver the precise amount of power even as processor requirements go from peak to minimal in as little as a few nanoseconds. This is critical as cloud computing servers include a number of power-hungry features such as quad core processors. The increasing power requirements of these features introduces difficult trade-offs for OEM power supply designers. In order to meet these dynamic power requirements while maintaining a small form factor, designs must be extremely energy efficient and place a premium on reducing component count, complexity and size. We believe these characteristics, which are specific to our proprietary digitally designed QS Mod products, are valuable to OEM designers.

As the server market transitions from Intel's Grantley family to Purley in about one year's time, we expect the significant design win activity we have enjoyed to date to translate into market share and revenue gains.

In our industrial segment, sales rose to $23.2 million compared with $18.9 million reported in the prior year, fueled by increased product sales for automotive and smart meters.

Over the past few years, MPS has been recognized by Tier 1 OEM automotive customers as a high quality and reliable supplier. We expect our future growth in automotive will be supported by the attractiveness of our superior efficiency and ease of use.

We will continue to invest in our quality and customer support capabilities as we enjoy gains within this market segment.

In our consumer segment, revenue increased 10.5% to $43.6 million compared with $39.5 million in Q3 of 2015. A majority of this increase was driven by sales gains in IoT and home appliances. As we look ahead, we see continued improvement in IoT, home and appliances, gaming, and other selective high-value consumer opportunities.

In our communication market segment, revenue of $16.2 million rose $1.4 million from the year ago quarter, reflecting gains in gateway revenue.

Finally, development of our e.Motion product family is continuing with customers evaluating our single-chip prototype. We are further refining the software and firmware and optimizing its performance based on specific customer demand. We remain positive about this game-changing e.Motion technology.

Turning back to the financials, compared with the prior quarter, Q3 2016 revenue increased $12.4 million or 13%, reflecting revenue gains in computing, consumer, and communications. Revenue mix for the quarter was 41% consumer, 22% industrial, 22% computing, and 15% communications. Q3 non-GAAP net income was $27.5 million or $0.66 per fully diluted share compared with the $0.55 per share in Q3 2015 and $0.54 per share in the previous quarter. This result is computed with an estimated tax rate of 7.5%.

Let's review our operating expenses. As indicated on last quarter's call, we expect an increase in operating expenses this quarter as we ramped investment in new product development, incurred costs associated with the development of our fourth fab, and capitalized on new business opportunities through strategic sales and marketing investments. As such, our non-GAAP third-quarter 2016 operating expenses of $29.4 million were $1.7 million higher than the $27.7 million we spent in the second quarter of 2016.

Our third-quarter 2016 GAAP operating expenses of $42.9 million were $3.5 million higher than GAAP operating expenses recorded in the second quarter. The difference between non-GAAP and GAAP operating expenses for these quarters is stock compensation and an unfunded deferred compensation plan. Stock comp expense increased $1.8 million between quarters, reflecting the catch up adjustment for the performance-based element of our MPSU program.

Now, let's look at the balance sheet. Cash, cash equivalents, and investments were $264.4 million at the end of the third quarter of 2016, up $15.2 million from the $249.2 million at the end of the prior quarter. Third-quarter cash flow from operations was $33.3 million compared with $12.8 million reported in the prior quarter. This increase in cash flow reflected a decrease in net working capital and other long-term assets. Spending on capital equipment and office space totaled $11.1 million. We paid $8.2 million in dividends in the third quarter.

Accounts receivable ended the third quarter at $33.3 million, up from the $31.4 million at the end of the prior quarter. Days of sales outstanding were 28 days in the third quarter of 2016, which was two days lower than the year ago quarter and two days lower than the 30 days reported in the second quarter of 2016.

Our internal inventories at the end of the second quarter were $70.7 million, higher than the $69.9 million at the end of the prior quarter. Days of inventory at the end of Q3 of 133 days decreased 14 days from the 147 days at the end of Q2. Inventory on our distribution channel decreased from the Q2 2016 level, reflecting an overall increase in end customer demand.

I would like now to turn to our outlook for the fourth quarter of 2016. We are forecasting Q4 revenue in the range of $101 million to $105 million. We also expect the following. Non-GAAP gross margin will be in the range of 54.8% to 55.8%. GAAP gross margin will be in the range of 53.9% to 54.9%. Total stock-based compensation expense will be between $11.8 million to $13.8 million. Litigation expenses will be between $100,000 to $200,000. Non-GAAP R&D and SG&A expense will be in the range of $27.3 million to $29.3 million. This estimate excludes stock compensation and litigation expenses. Interest and other income should be between $200,000 to $300,000 before foreign exchange gains and losses. Fully diluted shares will be in the range of 42.0 million to 43.0 million shares.

In conclusion, thanks to acceptance of our new product offerings and with our shareholders' support, we will continue to invest and deliver outstanding products for our customers and consistent results to our shareholders.

I will now open the phone lines for questions.

(Operator Instructions) Anil Doradla, William Blair.

Good job and congrats. I had a couple of questions. Can you go over the compute strength, especially in the context of Purley and what is going on? Has there been any change, and if so, what are the key reasons here?

Thank you. So, as far as the current quarter performance, we really saw the growth drivers to be sort of evenly split between our performance in high-end notebooks as well as in the server model. And as we look out ahead, those should be continued sources of strength well into next year before the Purley transitions. So, at this point, as far as the adoption rate and the ramp activity that we have been expecting, we don't see any changes.

Okay. Great. And on automotive, can you give some qualitative idea of the contribution? I know you have had somewhere -- anywhere between, I think, one-third or something like that. How much is auto as part of the industrial today?

Sure. So I usually wait until I get a full year of activity before we break out the segmentation. So you are correct that, at the end of last year, automotive accounted for about a third of industrial, which would represent about 7% of our total. It has been growing at an attractive double-digit rate -- high double-digit rate, albeit not as fast as it had in 2014 and 2015 when it doubled.

This is Michael. Both automotive and commuting computing segments where MPS has just entered only two or three years into -- in a market. Three years ago we have zero revenues, and now we have a fraction of the total market size. So the opportunity for growth is very big.

Excellent. Congrats, guys, and looking forward to a great 2017.

Rick Schafer, Oppenheimer.

Great quarter. I had a couple of questions. Maybe the first one -- I haven't asked this one before. But I know we focus a lot on your opportunities with all your new products, your new markets you're getting into and then penetrating. But if we look at your business by customer, can you comment on any significant new opportunities there? Any sort of potential 10% type customers that you see over the next year or two?

We don't see it. We are getting more than 10% of a number of our -- 10% of a customer. As a matter of fact, we don't have any. In the last few years, we tried to -- tried hard to diversify the Company product portfolio and also customer profile. And we found out in the last few years that we expand our customer base by -- I don't have exactly numbers, by 4 or 5 times, and probably even more. And so it is a lot more diversified than now. And I will continue our -- in the future, I will continue to see the same trend.

Okay.

And I would probably add to that very quickly is that we will be able to demonstrate in a lot of different market segments where we have been introduced to new customers and we have started out with some relatively low-end offerings, and then we have been able to incorporate their feedback into our design and go up as far as the amount of dollar content that we sell into them.

So I think that, in addition to just the pure acquisition of new customers that Michael referenced, we have also been able to do a good job of capitalizing on those relationships and growing them.

Okay. And then just a follow-up on -- storage is up very big again for you guys. I mean, are we already beginning to see the benefit of the ASP bump you guys enjoy with the new PCIE and FASP mix, or is this something else that is driving the growth and that is still going to be an incremental leg up?

I think in storage -- and again, I referenced this in the previous call, is that you are exactly correct that we have very good opportunities there, and it is as we increase the dollar content. The real story in the segment has to do again with the notebooks and servers. In storage we have sort of a mixed view as you have got gains accruing in the SSD and then some sort of mixed signals in the HDD market.

So I think that you are going to see a very positive trend for that segment that is going to be at or just below our corporate average, but really the near-term growth drivers are in the servers and in the notebooks.

Got it. And then, my last question. And I know Michael will laugh. I know he says he can't grow the company out of thin air, but fourth-quarter OpEx seems a little higher than we expected. I mean, what drives that in Q4, and when can we expect OpEx growth to probably drop closer to either target range, closer to 50% of top line? Thanks.

Well, I will let Bernie to answer that question.

I would be happy to. Thank you very much, Michael. So, as far as the operating expenses, I think that two of the big growth drivers there have been our investment in new products, as well as an increase in investment in sales and marketing, and much of this has been achieved through headcount acquisitions. While the pace of those headcount additions is probably going to slow, we will need to annualize those costs in next year, and then, on top of that, we will continue to make selective net headcount additions.

So the punch line in this is that we are probably going to look at a flattening in our rate of growth and returning to our expense model, but we don't expect to go -- see a decrease in the growth or the rate of growth of operating expenses.

Got it. Thanks, guys.

Ross Seymore, Deutsche Bank.

I wanted to ask a little bit of a longer-term question. On the last call, you talked about getting your revenue growth maybe at or above even 20% of the back half of next year. It sounds like you have a lot of good drivers just from tonight's call that you have already talked about. But if we put it in the 2017 as a whole perspective, what do you think will be the biggest tailwinds from a product cycle point of view, and are there any headwinds?

I don't see any headwinds. And all these products, like the servers and power modules and amount of other things, okay, we talk about it. And a lot of them, especially from a computing side, it is not really up to MPS. Okay? We did what we can, and all the seeds are planted. And we see the initial result -- and a higher growth, as we expected it -- the next high growth rate and we expected next few years, is all depending on whether the adoption rate of newer models. And this is the same in all the areas. And we have many design win activities and many projects under qualifications. And whether it is -- if we are going the same [strength] and the growth rate will be much higher than the corporate average in all of the segments.

And just to add to that is that I think you did a good job in saying that the two near-term growth drivers are firmly in place, and we are seeing good execution. And then, as we look to next year, we believe that the ramp of new product introductions in particular with the new server opportunity, as well as the modules that start to ramp, will be additive to that.

I guess, then, that is a perfect lead into my follow-up. When you were talking about the near-term trends, the positive trends, and the computing sides of things, you mentioned a good roadmap of growth up until Purley. Talk a little bit about what happens again when the Purley launches? Because, correct me if I am wrong, but I believe that actually should be a further acceleration as opposed to what could have been perceived in your answer prior as something changing to the negative?

Exactly right. Thank you. Give me the chance to clarify that point. Is that, as we looked at the last two to three years, we have developed relationships with many of the Tier 1 and Tier 2 server providers. And in the Grantley, the current version, we sold low dollar content for point of load and for ease uses. And as we looked at the transition to the Purley, sometime in the fall of next year, we expect to also be able to complement those sales with our V-Core solution. So our dollar content per server will go from $13 per box up to $49 per box. So we are very optimistic with the design wins that we have already seen converting into market share and revenue gains.

Thank you.

Okay. Let me add on this. I don't have -- in terms of a high growth rate in 2017, as I said it earlier, we expected that. In the near term -- and I don't have any crystal ball as everybody else, but I very firmly believe in the future 2017, 2018, 2019, where everything is in place.

Great. Thanks, again.

Quinn Bolton, Needham.

Just wanted to ask one on the OpEx. You guys have been ramping or spending on ramping an important foundry. I think on the last call you had said that most of those incremental expenses would be wrapped up by the third quarter. Just wanted to see if you could give us an update on the fourth foundry spending.

Sure. The fourth foundry has been developing quite nicely and, in fact, almost entirely according to plan. So we are actually very pleased with the development.

Now, the news that is additive to that is that we have made the decision to be able to transfer more new products into the fourth fab because we find that it is -- the capacity is there to take advantage of, as well as there are certain cost advantages that we have been able to take advantage of.

So, on that basis, we see that we are going to continue to invest into next year, albeit at a lower rate, but still there will be additional wafer spend and map sets as we bring the new products up in the next two to three quarters.

Yes. Overall, we just do it as we promised. We grow revenues and we grow the OpEx. Less than 60% of the revenue growth. And so last year, everybody criticized us (inaudible) 61% (technical difficulty). Next year, we will be in the model.

Great. Then, I was wondering, I think you talked about your high-value consumer opportunities for a while, I think one of those being gaming. It sounds like you guys have had some success on that front. Just wondering if you could provide a little bit more color as you look into 2017 how important gaming could be next year.

Sure. I think that we have been consistent there as far as, once again, it is an area where there's three primary gaming companies, and we have been developing relationships primarily with two of them, although not to the exclusion of the third. And, once again, I think we have seen that we have started out with sort of lower value content and then been able to further develop those relationships and to increase the content. So, as we look ahead to the design wins that we have solidified for next year, we seem very positive for continuing growth in gaming.

Yes, the gaming is just like any other segments. We have -- we clearly see our advantage in -- as a matter of fact, all computing segments. Gaming is a part of it and use a lot of computing power, and it is very opportunistic where we get that market.

Great. Thank you.

Tore Svanberg, Stifel.

Congratulations on another record quarter. Do you want a trick or treat question? Sorry. Bad joke.

So first question, could we dig into more of a little bit more -- you talked about your dollar content in server, but if we look at automotive, my understanding is, so far, most of the growth has been coming from LED lighting. At what point do you start to see really an inflection point as far as (inaudible) in automotive, and what are some of the technologies or components that would come from?

Sure. I think that I am going to answer this from the inverse as far as some of the areas that we re probably not as receptive to go into, and then I can develop the more optimistic form of the answer, is that automotive is an area that we want to be measured in where we invest our technology. We are doing a very good job as far as developing our QA and our reliability. But there are areas in the automobile such as the powertrain and the [ADAS] that may not be as high a value to us when you take into account what the risk potential could be.

So we are continuing to expand in our areas that we have much more strength as far as the infotainment as in the body lighting and audio systems and in certain aspects of safety as well as in the networking. But we are also making sort of a cautious approach to automotive so that we make sure that we are able to uphold what is best for the Company as well as for our shareholders.

Yes. The automotive -- we will all be criticized if we spend money to build up the infrastructures for all the safety, the engines. And now we just apply what we can, and we are not expanding on a budget.

Okay. That's helpful. And a question on the Quantum State Modulation technology. Obviously, that is giving you great success for design wins in the supermarket. Are there any other areas out there that we should keep an eye on as far as where that technology is applied and you are gaining some design wins?

Yes. As I said, the last quarters, and we didn't do well in the communication area. Although we are getting some high-value sockets and we exchange with a low value to more in the high-value content in the revenue streams. And I said okay, we will release some good killer product in the market segments, and if that is a Quantum State QS Mod, we will have a series of products that we are going to announce in those quarters. And if you go to the electronic guide, we will show it there.

Very good. One last question. You have obviously talked in the past about programmable power modules. Was just hoping to get an update there. Obviously that technology is sort of thought of as being used to go after the industrial market and just want to understand your success there so far, especially with the sales strategy.

It is a slow, but -- slow process. We gain market -- many segments of the market accepted it, that pharma, IoTs, pharma industrials, auto, and communication segments, even computing that is in the service light. And the revenue is ramping, but it is still small. It is not that small anymore, but it is ramping. But it hasn't really moved the needle yet, the entire Company's revenue. I expected that it would be the next few years you will see significant revenue contributors.

And just to sort of complete the thought, what differentiates us is both the power management technology, but, as importantly, it is the energy efficiency and the ease of use. And we think that, as we look forward to the adoption rates, particularly as we convert from the predesigned modules into field programmability, we see significant opportunities. We are very committed to this market.

Yes. The products that we are going to announce, was there any current up to 500 [RAM] current, up to 500 [AMP]. And everything can be modularized and require a very -- a very minimal or no design work.

Very good. Congratulations, again, guys.

David Wong, Wells Fargo.

Could you give us a rough idea of what proportion of servers in your storage division -- storage and computing division is servers, and what was the year-over-year growth in server in the September quarter?

Sure. The servers -- again, using the full-year numbers -- I'm sorry. Did you say storage or servers?

Servers. Servers in there, yes. What proportion is servers?

Okay. So, again, using last year as sort of the baseline for it, servers only accounted for between 10% and 15% of the market segment. And the growth of servers is not quite triple digits, but it is in the very high double digits this year.

Great. Thanks very much.

(Operator Instructions) Steve Smigie, Raymond James.

I was hoping you could talk a little bit about computing in Q3 and into Q4 or all storage and computing in the sense that, for example, we saw with Intel had a very strong quarter, but then the guidance is a little bit below expectations. And it sounds like overall the business is looking really great, but I just want to try to make sure I have expectations right for Q4. Would it be fair to say that Q3 was maybe a little bit stronger than expected, and so Q4 might be down a little bit more than seasonal or something like that?

So, if you look at Intel, they are looking at the desktop and the notebook market in total, both the high end and the low end. And we are benefiting from sort of an upswing currently that is occurring with both the adoption of our technology into the high-end notebooks, as well as the development of a pretty strong performance in the high-end notebook market. So that is what differentiates ourselves, I think, from their story.

And we did have a good performance in Q3, which actually fell in line with our expectations, and we don't necessarily see that same falloff in Q4.

Okay. Great. And then, within industrial, you guys mentioned the strength in metering as you did last quarter. Could you talk about how big that is, and I am assuming, overall, industrial is still pretty dispersed, and that is just kind of one example. But I'm just kind of wondering how impactful metering is to that overall business at this point?

Sure. Metering has actually been growing very, very well, and while we tend to focus primarily on the automotive part of the story of industrial, meter is growing at a rate that is significantly above our corporate average. And it is not from an insubstantial base.

So when you look at industrial, again, as you said, we are very diversified because we also have sources -- revenue sources coming from meter, as well as security and point of sale systems. And all three of those lines are developing quite nicely.

Okay. And last question was just, could you give some sense sequentially how you might expect each of the segments to perform?

Sequentially, I think, if you look at our guidance here, revenue is decreasing in Q4 a little less than normal seasonal average, and really that reflects the diversification because we are seeing sort of flattish performance in the communications and computing. You have a normal sort of seasonal down in consumer, and we still see good growth in industrial.

Okay. Great. Thank you.

Tore Svanberg. He just left the queue.

He just left the queue. With no additional questions at this time, I would like to turn the conference back over to Bernie Blegen for closing comments.

Great. I would like to thank you all for joining us on the conference call and look forward to talking to you again in the fourth-quarter conference call. Thank you and have a happy Halloween.

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