芯源系統 (MPWR) 2016 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Monolithic Power Systems' Q4 2016 earnings call.

(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, Chief Financial Officer. You may begin.

Good afternoon, and welcome to the fourth quarter and FY16 Monolithic Power Systems conference call. Michael Hsing, CEO and Founder of MPS, is with me on today's call.

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

Risks, uncertainties and other factors that could cause actual results to differ are identified in the Safe Harbor statements contained in the Q4 earnings release, and in our SEC filings, including our Form 10-K filed on February 29, 2016, and Form 10-Q filed on November 3, 2016, both of which are 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, R&D and SG&A expense, operating income, interest and other income, net income and earnings on both a GAAP and a non-GAAP basis. These non-GAAP financial measures are not prepared in accordance with GAAP, and should not be considered as a substitute for or superior to measures of financial performance prepared in accordance with GAAP. A table that outlines the reconciliation between the non-GAAP financial measures to GAAP financial measures is included in our earnings release, which we have filed with the SEC.

I would refer investors to the Q1 through Q4 releases for 2015 and 2016, 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 the earnings release filed with the SEC earlier today.

Let's begin with a top-level summary of 2016 revenue. Our full-year revenue was $388.7 million, up 16.7% from the $333.1 million MPS reported for 2015. This year-over-year growth compared favorably with the analog industry, which SIA estimates grew 5.8% over the prior year.

On a GAAP basis, full-year 2016 gross margin of 54.3% expanded is 20 basis points from the prior year. GAAP operating income grew to $54.4 million, representing a 32.6% increase over 2015. Finally, MPS recorded GAAP EPS of $1.26.

On a non-GAAP basis, gross margin expanded 20 basis points from the prior year to 55.2%. Non-GAAP operating income of $102.6 million grew 25.6% over 2015. MPS achieved record non-GAAP full-year earnings of $2.30 per share, 21.7% higher than 2015.

Diving into year-over-year revenue growth by market segment, full-year computing and storage revenue was up 42.4,% and industrial revenue grew 35.1%. Full-year consumer revenue was up 6.0% over 2015, and communications revenue was essentially flat between years.

Let me speak to highlights by market segment. In computing in computing and storage, full-year 2016 revenue of $80.6 million increased $24.0 million year over year, reflecting strong sales growth for cloud computing, SSD storage, and high-end PCs. Computing and storage revenue represented 20.7% of MPS's total revenue in 2016.

In the industrial market segment, revenue grew $23.2 million to $89.6 million, fueled by product sales for applications in automotive, security, smart meters and power sources. Industrial revenue as a percentage of total revenue grew to 23.1% in 2016.

Revenue from consumer markets increased to $153.7 million, and represented 39.6% of our total revenue. The year-over-year revenue increase was driven primarily by gains in high-value consumer markets, including home appliances and battery management systems.

While MPS has consistently achieved high rates of revenue growth, we believe our technology lead is widening, and we are in the early stages of expanding our addressable market. With increasing visibility into long-term design engagements we believe MPS is uniquely positioned to deliver sustainable, profitable growth. As a case in point, with our superior digital power solutions, we continued to successfully win and gain share for high-end, space-limited notebook solutions.

As Intel conditions to the Purley server cycle later this year, we believe MPS's energy efficient solutions positions us for growth in cloud based data centers. In gaming, our QS Mod solutions are being adopted by a major gaming OEM for its high-end console. In addition, we believe the significant automotive design win momentum experienced during the past four years will continue to drive industrial revenue growth.

Finally, we have completed development of a high-voltage SOI process technology which will enable us to grow into a number of new market segments. In the next few quarters, we will be introducing a number of products utilizing this technology for the medical market.

Switching to Q4, MPS had a record fourth quarter, with revenue of $103.6 million, 2.7% lower than revenue generated in the prior quarter, but 19.2% higher than the comparable quarter in 2015. By market segment, revenue for computing and storage grew 60.8%, and industrial revenue rose 40.5% over the same period of 2015. Quarterly revenue for the communications segment increased 7.6% over the prior-year period, while consumer revenue was essentially flat with prior-year period.

GAAP gross margin was 54.5%, 10 basis points higher than the prior quarter of 2016, and 50 basis points higher than the fourth quarter of 2015. Our GAAP operating income was $17.5 million compared to $15.0 million reported in the prior quarter of 2016, and $11.8 million reported in the fourth quarter of 2015.

For the fourth quarter of 2016, non-GAAP gross margin was 55.4%, 10 basis points higher than the prior quarter of 2016, and 40 basis points higher than the fourth quarter from a year ago. Our non-GAAP operating income was $29.0 million, compared to the $29.4 million reported in the prior quarter and the $22.5 million reported in the fourth quarter of 2015.

Let's review our operating expenses. Our GAAP operating expenses were $39.0 million in the fourth quarter, compared with $42.9 million in the third quarter of 2016. Our non-GAAP fourth-quarter 2016 operating expenses were $28.4 million, down from the $29.4 million we spent in the third quarter, and up from the $25.3 million reported in the fourth quarter of 2015.

On both a GAAP and a non-GAAP basis, fourth-quarter litigation expenses represented a $321,000 net credit, as a portion of a $3 million IP settlement was recorded as income. The remainder of this settlement will be recorded as income over the next several years.

The differences between non-GAAP operating expenses and GAAP operating expenses for the quarters being discussed here are stock compensation expense and income or loss on an unfunded deferred compensation plan, as well as a write-off of contingent consideration recorded in the fourth quarter of 2015. Stock comp expense was $10.4 million in the fourth quarter of 2016, compared with $13.1 million in the prior quarter of 2016.

Switching to the bottom line, Q4 GAAP income was $16.6 million or $0.39 per fully-diluted share, compared with $0.34 per share in the previous quarter of 2016, and $0.24 per share in the fourth quarter of 2015. Q4 non-GAAP net income was $27.5 million, or $0.65 per fully diluted share, compared with $0.66 per share in the previous quarter of 2016, and $0.51 per share in the fourth quarter of 2015.

Let's look at the balance sheet. Cash, cash equivalents and investments were $273.6 million at the end of the fourth quarter of 2016, above the $264.4 million at the end of the prior quarter of 2016. For the full year 2016, MPS generated operating cash flow of about $107.8 million, and for Q4 2016, operating cash flow was $31.0 million.

Cash proceeds from employee stock option exercises contributed about $1.3 million for all of 2016, and $153,000 in Q4. These cash flows were partially offset by $8.1 million to purchase capital equipment in Q4 of 2016.

Accounts receivable ended the fourth quarter at $34.2 million, or 30 days of sales outstanding, which was slightly higher than the $33.4 million or 28 days reported at the end of the prior quarter of 2016. This modest increase was due to a higher proportion of the quarter's sales being recorded in the third month of Q4, compared with the prior quarter. Fourth-quarter 2016 days sales outstanding were two days lower than the 30 days posted in the fourth quarter of 2015.

Our internal inventories at the end of the fourth quarter of 2016 were $71.5 million, up from the $70.7 million at the end of the prior quarter. Days of inventory increased to 138 days at the end of Q4, from the 133 days at the end of the third quarter of 2016.

I would like to turn to our outlook with the first quarter of 2017. We are forecasting Q1 revenue in the range of $98 million to $102 million.

We also expect the following: GAAP gross margin in the range of 53.8% to 54.8%; non-GAAP gross margin in the range of 54.8% to 55.8%, total stock-based compensation expense of $12.1 million to $14.1 million, including approximately $400,000 that would be charged to cost of goods sold; litigation expenses of $150,000 to $250,000; non-GAAP R&D and SG&A expenses to be in the range of $28.3 million to $30.3 million. This estimate excludes stock compensation and litigation expenses.

Other income of $300,000 to $400,000 before foreign currency exchange gains or losses. Fully diluted shares to be in the range of 42.8 million to 43.8 million shares, before any share buyback.

In conclusion, in the last several years, MPS has focused on investing in new products, and targeted markets. Starting this year, we believe MPS will begin to benefit from those investments which will translate to strong revenue growth in 2018 and beyond. I will now open the microphone for questions.

(Operator Instructions)

Quinn Bolton, Needham & Company.

Congratulations on the nice results and outlook. Wanted to start, Michael and Bernie, on the notebooks business. We just had the formal launch of Kaby Lake at CES, and so wondering if you could give us your outlook now that the processor is formally launched.

And a related question, Intel, I think is planning yet another 14-nanometer processor to be introduced in the second half of the year ago, I think with Kaby Lake, you picked up market share. If we look forward to that eighth-generation core processor Intel is talking about introducing towards the end of year, do you think you might be poised for additional share gains on those client platforms?

Sure. Quinn, thank you very much for the question. As we look at 2017 and 2018, certainly going into the Kaby Lake, we benefited significantly by having the reference design, and we've been able to see a lot of very good traction for our power solutions. Because as we mentioned in the script, the efficient overall efficiency and the small form factor. So as we look at the current year, we continue to see the similar growth rate as we've experienced in the previous generation of Intel products.

Now as we look out to the product, which I believe you are referring to, of Intel's next generation, Cannonlake, which I believe may come out at the end of this year or in the early part of 2018, we go from not only being a reference design, but also, we have been designed into their core product, which is a significant enhancement over our previous position. So we remain very optimistic and that relationship for the high-end notebooks.

Quinn, Michael. Let me add on. I'm very aware, like any other investors, that notebook is associated with lower margins. And however, we develop based on the QS Mod technology. We developed those products and these are very unique ones, and we're only focused on size constraint and requires -- mobile longer runtimes, which is a very highly efficient, and also it is a time to market, because our products it is very easy to use.

So we only focused on those high end markets. As I see the mobile market segment, it's only one of the product lines, and we're not really concentrated on it. We really focus on the balance to growth in the overall MPS.

Thanks for the additional color. I wanted to move onto that new process technology that you just announced on the call, the high-voltage SOI process. And Bernie, I think in the script you mentioned some medical products.

I would have thought there could be applications for low-power SOI in other, perhaps industrial or perhaps even comm. Other related markets. So wondering, is there a particular application or use case within medical, or do you see that really is just the first markets and you get opportunities well beyond the medical market for that SOI process?

You mentioned exactly right. All these -- all the other market segments, MPS couldn't within the industrial, even auto and medical, and for some of the products segments, so we could not address it. And we think the long haul, the high-voltage SOI is the best way. So it took us a couple years to develop that technology, and the first products, the first few products will be in the medical market segment.

Michael, is that with one of the existing port foundries, or will that be a process that they require a new foundry engagement?

Both, actually. This product is implemented in the new foundry.

Okay, great, thank you.

Steve Smigie, Raymond James.

This is Vince Celentano on for Steve. So right now, infotainment is your biggest part of revenue within auto. Is that more so due to Monolithic deciding that this is the area that you're best positioned to take share in, or is it more of a matter of Infotainment having the highest content opportunity? If it is the latter, what would you say are your next largest content opportunities within auto?

There are a number of opportunities that we are designed into, in automotive. I think that our initial footprint, when we started out in the area four years ago, was definitely in the infotainment, and now we have moved into any of the lighting systems, a lot of the systems that are either in the body or designed into sensors. We are into some of the light ADOS areas. So I don't think that we are necessarily restricted in any way, and that I think we have a broad set of offerings for automotive. And as we referenced, we've had design wins and a lot of momentum that we expect to continue out into 2018 and 2019.

Okay, thanks. Last quarter you mentioned that server was 10% to 15% of computing in 2015. Is there any way you can give us an update on what 2016 was and what your expectations are for growth in 2017?

I think with server, we feel very positive and optimistic, and that optimism is due to a lot of the reference designs that we have, in addition to the fact that in the next generation, Purley, we are going to be not just increasing in the number of OEMs that we will be working with, but also, we will be increasing the dollar content, going from something in the mid-teens up to the high $40 on a per-server basis. So, we see as the rollout occurs here in the second half of the year, that we should get some good momentum, and that we really should see some sales gains occurring in the early part of 2018.

Great, thank you.

Rick Schafer, Oppenheimer.

I'll add my congratulations. Maybe a quick follow-up on server, since we were just talking about it. Can you maybe walk us through or talk about the competitive landscape, and what visibility you have regarding market share on Purley specifically, later this year? And as we look into 2018?

I think to begin with, on the servers, this is an area where we had essentially zero market share just as recent as a couple of years ago. So this is almost a continuing Greenfield opportunity for us. Obviously, there is a couple of very dominant players in this market, who are very well established as far as their relationships, as well as the technology.

The feedback that we've been receiving, particularly in the area of cloud computing, that we are most interested in being able to take advantage of, has been very positive. We think that we have unique offering that sufficiently differentiates ourselves in order to be able to get the design win, and also to command very attractive ASPs and margins.

Okay. So no hint on where -- or any visibility on what market share you might have there coming?

I think in an earlier call, that we allowed for the potential of being between 10% and 20%, and again, I think that's a long-term opportunity, and what we want to do is remember there is well-established competitors here, and that we are starting from a very small space.

Let me add something, and we can divide into what the market share means. You see, our servers are pretty steady growth, and we will continue to see the acceleration in the end of this year and next year. So which are these areas? A few years ago, our [point and below] product and penetrated into server now is widely adopted, and across the board.

Two years ago, we introduced electronic fuse, and now became almost a sole-source for some for the first tier server makers. And from core power, we penetrated in the last couple years, we are penetrating the second-tier server makers, and now as we are growing the revenue. And also last year, we penetrated a few first tiers.

However we emphasized not on the bulk of the volumes for a common footprint, we are not participating in that, because those are lower-margin products. We only concentrate on highly efficient, high frequencies. So those servers require that, and we believe in the longer term that's the market trend, and we will get a majority, we will get a high percentage of our market share in 2018 and 2019.

Got it, that's really helpful, Michael. Maybe as a follow-up. Any update to, I didn't hear you mention in your prepared remarks, any update on the timing of your new website launch, and where we are now with your new e-commerce initiative? And maybe as part of that answer, is there any way to help us quantify what that dollar opportunity or what the potential to be there? What that ramp might look like?

The programmable modules, we are launching it already and you will see our -- we are still selling through the traditional channel, however the new website will be delayed a little bit, but it will be either in March or in April, we will see the new website.

If I can add to this, there is a continuum here, where what we are beginning to see is good traction with regard to our pre-designed modules, where they are generating a good amount of money, good amount of revenue on a quarterly basis, and than what we expect to do is introduce the new website, and that will be how we will launch the field programmable modules, as well. I think that everything is tracking exactly as we had hoped it would.

Got it, and if I could sneak one in. Any update that you can give us on the Intersil lawsuit would be great. Thanks a lot.

We cannot comment too much, because that's in a courtroom in the legal proceedings and that's only thing we said, MPS will defend vigorously our IP.

Okay. Thank you.

Ross Seymore, Deutsche Bank.

This is actually Matt Simon Ross's behalf. I will echo the congrats on the solid results. My question has been alluded to by some previous callers, but I just want to ask it a little more directly.

There was some talk in the script about the visibility into longer-term design engagements, one of which being server. I'm curious if you can give us a rough timing of the magnitude of those ramps. The high-end notebook solutions were mentioned, the gaming of QS Mod, and more generally the other design win momentum. Is there any way to roughly time when that acceleration should happen, or is it just a general framework that we should be thinking about?

We think in the second half of this year in the server side, the revenue will ramp. Of the design-in activity, even though in the core power, even the core power, we still will gain a significant amount of market shares. And those are not -- may not be in the mainstream, but we have an order -- I'm talking about other first tiers, but it is a giant step for MPS.

And the timing of gaming and auto, should we do about that in the same way, in the second half, or would the timing differ?

I think as far as automotive, that's a continuation of the momentum that we've been generating in each of the last three prior year. Whereas gaming, I think that we have some new opportunities that will be additive, and we should look for those to start to kick in, in Q3 of this year.

Okay. And on the OpEx front, I know last year was an investment year. Could you give us your initial outlook for spending plans later in 2017? Obviously we have the 1Q guide, but any initial color on OpEx for the rest of the year would be helpful.

I think you are familiar with what our long-term model is, and we want to grow operating expenses at a rate that is 50% to 60% out of our revenue growth rate. Certainly in 2016, we have mentioned that we had some excellent opportunities as far as generating new product investment, as well as sales and marketing resources, as well as the investment in our fourth fab. And we expect to continue to invest in all three of those initiatives, albeit at a lower rate of growth in 2017, and we do not plan to add headcount at the same level as we did in 2016.

Okay, thanks so much.

Anil Doradla, William Blair.

Michael and Bernie, congrats from my end, too. So 2017, clearly a very inflection year in some ways, right? You got these three or four product segments, you talked about the servers second half. You've got the programmable stuff, you've got autos kicking in.

So when we step back, I think you've given some color, but if you were to sum it up really 2017 in general, it sounds like a pickup in a second half, primarily driven by the server. And how should I be looking at some of the programmable stuff? SO if you could help us understand the optics of first half second half, big picture, that would be great.

Sure. I think just the way you position that comment is actually very helpful to understanding the dynamics here. We actually have three, four, or five unique opportunities that are coming on stream in 2017.

And when we look at the timing and the order of magnitude for them, I think it is good to be a little bit cautious, only because there's certain events that are not 100% in our control, and those that are, we have some level of execution risk. So as we look ahead to 2018 we believe that those elements will all have sorted itself out, and that we will be able to fully capitalize on the -- take advantage of these opportunities.

Let me add on. To me, the 2017 is done. All the designing, products, I don't think our customers can change it. And it would take extraordinary effort to change that.

And so, when the revenue happens, and again, many particularly in the cloud computing, some of the notebooks, some of the servers and some of the data centers and these are depending on our customers. And also the third-party really the product like Intel, the processors. To me, within the plus or minus of a few months.

So related to other market segments like auto, this is a very steady state of growth. We see a lot more designing activities in the last couple of years. That will all translate into revenues. Second half of 2017 and 2018. And at the same time, don't forget we still have a high-end consumer business I've seen IoT will grow this year tremendously.

Right. So sounds like from the investment community point of view, I think we should be focused on the server opportunity in 2017. That seems to be the most material delta as the year progresses?

Frankly, I see the very similar growth rate, and the Company designed it that way, very balanced the growth, and growth at a high rate.

Right. I would have to agree with Michael there, that I think that you would be limiting the message to focus solely on servers. We again are very excited about that opportunity, but not at the expense of what we are seeing with the high-end notebooks, what we are seeing with the gaming opportunity. And Michael brought to light what we are seeing with appliances through the Internet of Things in high-end consumer.

Okay, great. And finally, Bernie, your guidance of 54.8% to 55.8% on the gross margin front, similar to what you guided I think in the December quarter. But given that the mix and the mix shift seems to be moving towards some of these higher-margin businesses, is that guidance based on just conservativeness, or -- I'm taking thinking the gross margin should trend upwards as the year goes by.

I think if you look at how we progressed gross margin in 2016, we went up 10 to 20 basis points quarter over quarter. So we ended up with the gross margin in Q4 that was 40 basis points higher than the year before. And I would expect a similar trend line to occur.

You are right, that a lot of the new revenue growth is at higher margins, and we're also seeing some of the investments we made, particularly with the new fab, that those should also generate improvements to gross margin. But the thing we want to manage first and foremost is very predictable, modest as I said, 10 to 20 basis points increases in gross margin, and to the extent that we can afford to add in lower margin business to accelerate revenue growth, that's really what our business model is based around.

Great. Thanks a lot.

(Operator Instructions)

Tore Svanberg, Stifel.

Michael, Bernie, congratulations on another solid growth year. First question is on the high-voltage SOI process. Should we think about the competitive advantage here being similar to some of your other processors? Meaning being able to integrate many components, or are the other elements to the advantage as well?

Exactly. And including other components down the road. We think this is a really, a game change. We can take a look at other opportunities and the technology that we targeted. So we will be able to deliver single much more cleaner, and also we integrated a lot more than the silicon technology is capable.

Very good. My second question is on your module business. Could you just update us where you stand there, and are you in production already on the programmable module products?

It is in production now and sales volumes are very little, and very -- at the initial stage. And these are mostly for industrial applications, smaller, and also smaller customers. A variety of them, including some of the small customers in the consumer space. We will really emphasize the website, which will launch in March or April.

I think that there's also a longer-term opportunity in the communications market for the field programmability, so it is an interesting product family, where we are trying to encourage more these low end, small volume, industrial and consumer opportunities, but at the same time, we see a longer-term opportunity in the wireless infrastructure for the comms market.

I forgot about the programmable product for telecom, for the infrastructure. We launched the product and again you can see on YouTube, you can see on our website, you can parallel all of them from 20 amps to all the way to 1,000 amps and in the APAC show in March, we will demonstrate something like a 1,000 amp or 2,000 amp solutions and those are one-of-a-kind. Well received among the telecom companies.

Okay. And maybe on the topic of communications, it was flat year-over-year, and in the spirit of balanced growth, how should we think about the communications market for you this year? Do you expect some growth, or will it still maybe lag a little bit some of the other end markets?

I think at this point, and again let's talk about the nature of the market. You've got the gateway wireless, which tends to be a little bit low end and has some characteristics that are similar to consumer. And then you have the higher end network, which as we were just talking, we believe has great promise for us.

We are very committed to that part of the market. As we are just introducing the products now, and while the feedback has been very positive from the telco companies, it is like any product release. It takes time, and this tends to be a lumpy marketplace where you can, if you win a large customer, you can have a significant order.

But the time it takes to win the trust and win the relationship, and demonstrate the value of your technology, it makes it a little hard to predict. So I think the way we intended to look the comms market physically any quarter plus or minus $1 million, and there will be a point of inflection, but it is probably later in 2018.

Very much, I agree.

Fair enough. Just one last question, we are hearing about some foundry capacity getting tight. You are obviously expecting another good growth year this year. Do you feel like you have with all their foundry partners, you have all the capacity in place for another good growth year this year?

Yes. We made the investments in order to be able to manage the growth for 2018 and 2019 and even beyond that, and it is not just on pure capacity, but as we are referencing, as far as a partner to help us with the new technology, we feel very, very well-positioned.

Very good, congrats again. Thank you.

Quinn Bolton, Needham & Company.

Just wanted to follow-up on some of these new product drivers. You've got high-end notebooks sprinkled nicely through the year, you've got the new game console. You've got early power management. A lot of those seem like they are pretty back-end loaded into the second half of the year.

You typically have pretty strong seasonality, with a third quarter typically at a peak. What I'm trying to get a sense of is, do you think that these new opportunities and the timing of those ramps could change seasonal patterns this year and into 2018, or is it best to think that those products ramp, but probably don't ramp to such a degree that is going to change your typical seasonal pattern?

That's a very good question. We are also puzzled. As you have seen MPS started about four or five years ago, have a transitional to more diverse market segments.

And last year, I hoped that we had every quarter as consecutive growth, with the lack of Q4. But Q1 Q2, Q3 and Q4 is shy of it just a little. And so obviously the pattern is changing, and what we will see probably this year is a very similar or even, I can hope, I still hope we could have a consecutive quarter to quarter growth for four or five quarters in a row.

Great. Thank you, Michael.

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

Great. I would like to thank you all for joining us for this conference call, and look forward to talking to you again during our first-quarter conference call, which will be most likely at the end of April. Thank you, and have a nice day.

Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program. You may all disconnect. Everyone, have a great day.