芯源系統 (MPWR) 2017 Q1 法說會逐字稿

Good day, ladies and gentlemen, and thank you for your patience. You have joined the Monolithic Power Systems Q1 2017 Earnings Conference Call. (Operator Instructions) As a reminder, this conference may be recorded.

I would now like to turn the call over to your host, Chief Financial Officer of Monolithic Power Systems, Mr. Bernie Blegen. Sir, you may begin.

Thank you very much. Good afternoon, and welcome to the first quarter 2017 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 Q1 earnings release and in our SEC filings, including our Form 10-K filed on March 1, 2017, 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, R&D and SG&A 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 Q1 2016, Q4 2016 and Q1 2017 releases as well as to the reconciling tables that are posted on our website.

I'd also like to remind you that today's conference call is being webcast live over the Internet and will be available for replay on our website for 1 year, along with the earnings release filed with the SEC earlier today.

MPS had a record first quarter, with revenue of $100.4 million, 3.1% lower than revenue generated in the fourth quarter of 2016, but 18.8% higher than the comparable quarter in 2016. MPS continues to benefit from technological leadership and our diversified multimarket strategy. Looking at our revenue by market. First quarter 2017 industrial revenue of $27.7 million grew 50.2% over the same period of 2016, fueled by product sales for applications in automotive, power sources and smart meters. Industrial revenue as a percentage of total Q1 2017 revenue grew to 27.6%. In our computing and storage market, revenue of $20.6 million increased $5.2 million or 33.9% year-over-year, reflecting strong sales growth for SSD storage, cloud computing and high-end notebooks. Computing and storage revenue represented 20.5% of MPS's first quarter 2017 revenue.

Revenue from consumer markets increased 5.3% over the first quarter of 2016 to $35.6 million and represented 35.5% of our Q1 revenue. The year-over-year revenue increase reflected solid improvements in high-value consumer markets, including home appliances and lighting, tempered by lower sales for set-top boxes. First quarter 2017 communication revenue of $16.4 million decreased 2.5% from the first quarter of 2016 and represented 16.4% of our total first quarter revenue.

GAAP gross margin was 54.6%, 10 basis points higher than the prior quarter of 2016, and 70 basis points higher than the first quarter of 2016.

Our GAAP operating income was $13.6 million compared to $17.5 million reported in the fourth quarter of 2016 and $10.4 million reported in the first quarter of 2016. For the first quarter of 2017, non-GAAP gross margin was 55.5%, 10 basis points higher than the prior quarter of 2016 and 50 basis points higher than the first quarter from a year ago. Our non-GAAP operating income was $26.5 million compared to $29.0 million reported in the prior quarter and $20.0 million reported in the first quarter of 2016.

Turning to automotive. Macroeconomic trends in the industry appear soft. However, our market penetration is in the very early stages and we believe our future growth will be largely driven by gaining market share. Accordingly, we expect revenue for the next several years to continue to grow at a rate significantly above market as MPS's footprint in automotive is relatively small, while the market size and opportunities are tremendous. Growth trends in automotive electronic applications align well with MPS technologies, as consumers demand higher connectivity and access to more intelligent content. More importantly, the proliferation of sensors and multicore processors for autonomous driving capabilities provide MPS with increased available dollar content for each vehicle. These trends will have a strong positive influence on our business prospects over the long term.

In addition to continued momentum from automotive, we expect to layer on new revenue streams in 2017 and in the years ahead. Beginning in Q2 2017, product ramps for MPS's superior digital power solutions will drive growth in applications for cloud computing, gaming consoles and high-end notebooks. We expect our digital power solutions will be further adapted in 2017 and 2018 for use in field programmable applications, networking and automotive.

Let's review our operating expenses. Our GAAP operating expenses were $41.3 million in the first quarter compared with $39.0 million in the fourth quarter of 2016 and $35.1 million in the first quarter of 2016. Our non-GAAP first quarter 2017 operating expenses were $29.2 million, up from the $28.4 million we spent in the fourth quarter and up from the $26.4 million reported in the first quarter of 2016.

On both a GAAP and a non-GAAP basis, first quarter litigation expenses were $286,000 compared with a $322,000 net credit in Q4 2016. A portion of a Q4 2016 IP settlement was recorded as income in that quarter's litigation expenses and a similar adjustment was not repeated in the first quarter of this year. The differences between non-GAAP operating expenses and GAAP operating expenses for the quarters discussed here are stock compensation and income or loss on an unfunded deferred compensation plan. Total stock compensation, including approximately $400,000 that was charged to cost of goods sold for the first quarter of 2017, was $11.7 million compared with $10.7 million recorded in the fourth quarter of 2016.

Switching to the bottom line. First quarter 2017 GAAP net income was $14.5 million or $0.33 per fully diluted share compared with $0.39 per share in the fourth quarter of 2016 and $0.25 per share in the first quarter of 2016. Q1 non-GAAP net income was $25.2 million or $0.58 per fully diluted share compared with $0.65 per share in the previous quarter of 2016 and $0.45 per share in the first quarter of 2016. Fully diluted shares outstanding at the end of Q1 2017 were 43.3 million, which included a one-time increase of approximately 500,000 shares upon adoption of the new accounting standard for stock compensation.

Now let's look at the balance sheet. Cash, cash equivalents and investments were $284 million at the end of the first quarter of 2017 compared to $273.6 million at the end of the fourth quarter of 2016. For the quarter, MPS generated operating cash flow of about $21.9 million compared with Q4 2016 operating cash flow of $31.0 million. First quarter 2017 capital spending totaled $3.4 million. Accounts receivable ended the first quarter of 2017 at $38.1 million or 35 days of sales outstanding, which was slightly higher than the $34.2 million or 30 days reported at the end of the fourth quarter of 2016. This modest increase was due to a higher proportion of the quarter's sales being recorded in the third month of Q1 compared with the prior quarter. Days sales outstanding for the first quarter of 2017 were 4 days higher than the 31 days posted in the first quarter of 2016.

Our internal inventories at the end of the first quarter of 2017 were $78.5 million, up from the $71.5 million at the end of the fourth quarter of 2016. Days of inventory increased to 157 days at the end of Q1 2017 from the 138 days at the end of the fourth quarter of 2016 and 145 days at the end of the first quarter of 2016.

I would now like to turn to our outlook for the second quarter of 2017. We are forecasting Q2 revenue in the range of $109 million to $113 million. We also expect the following: GAAP gross margin in the range of 54.1% to 55.1%; non-GAAP gross margin in the range of 55.0% to 56.0%; total stock-based compensation expense of $12.5 million to $14.5 million, including approximately $400,000 that would be charged to cost of goods sold; litigation expenses ranging between $200,000 to $300,000; GAAP R&D and SG&A expenses between $42.0 million and $46.0 million; non-GAAP R&D and SG&A expenses to be in the range of $29.9 million to $31.9 million. This estimate excludes stock compensation and litigation expenses. Other income is expected to be in the range from $400,000 to $500,000 before foreign exchange gains or losses. Fully diluted shares to be in the range of 42.9 to 43.9 million shares before share buyback.

In conclusion, we continue to grow and continue to enhance shareholder value.

I will now open the phone lines for questions.

(Operator Instructions) Our first question comes from the line of Quinn Bolton of Needham.

So I just wanted to start off with some of the revenue drivers for 2017, 2018. It sort of sounds like the Kaby Lake transition, share gains on game consoles and related devices, and then server power management are kind of the 3 near term, next 12 months drivers. And just in terms of the timing, it kind of feels like probably notebooks first, game consoles maybe starts to ramp late here in Q2 and then servers closer to year-end, and just wanted to see if that's kind of the right timing from your perspective in terms of the ramp of those 3 opportunities?

Quinn, thank you very much. I think that the way that you sequenced those opportunities is correct and let me just add a little bit of color. So the notebook opportunities, we expect to be sort of steady and consistent growth. It's not as if there is a big bang that's going to occur in 1 quarter and then grow from there. When we look at gaming, obviously, that's driven around the holiday season. So we would expect that with the adoption of the gaming console business that, that should be weighted more heavily into Q3, although it may have a tail into Q4 as well. And then certainly, with the servers, as we've discussed in the past, much of that -- while we've continued to see good revenue growth, much of the next layer of growth, we believe is expected with the Grantley to Purley transition, which is expected through the second half. And then again, we see good gains to come as we are designed into new platforms and also we branched out into new OEMs, and that would include both our POL and our E-Fuse products. And then we believe over time that we will see adoption rates for our VCORE power management solution that we call QSMod as that goes from Tier 2 to Tier 1, and in particularly, the cloud providers.

And on those cloud providers, where they tend to be sort of early adopters in the sort of server upgrade cycle, does that kind of ramp, do you think, maybe then towards the tail end of 2017? I know Intel often provides early access to some of those hyperscale guys, or do you think that's still kind of more closer to year-end and into early '18 for that hyperscale cloud opportunity?

I think that when we look at the MPS's overall energy efficiency solutions, they really do basis for growth in the cloud-based data centers. And yes, they do have earlier adoption rates.

Quinn, this is Michael. Although the company's strategy is that we don't really care in which market segment how we time it and how we time it in related to growing our MPS revenues, so these -- we actually -- in opposite, we don't want to -- we want to get associated with -- are we tied to Xbox, are we tied to whatever the game console have, like game platforms, and the Intel, when they're going to release the -- into production of whatever the processor is. These are just our opportunity and that we only want to ensure our gross margin and a steady growth. And our customers phasing whatever the -- whichever the product is, we don't count that. And it's all within a plus/minus 6, 7 months, as I said earlier.

Okay, great. And then just -- go ahead, Bernie.

I'm sorry, just a finishing thought on Michael there. One of the interesting characteristics as Michael just laid it out as well is that it provides for a steady growth ramp both for the second half of 2017 as well as throughout 2018.

Great. And then just a follow-up question, which you talked about sort of some general macroeconomic weakness in the automotive sector. But the share gains would allow you sort of over the next several years to grow faster than the market. And I'm just kind of wondering, do you think that, that there is any point in time where macroeconomic conditions can change the near-term outlook? I mean, does macro change so quickly that it can impact your quarter-to-quarter revenue ramp on automotive or do you think the share gains are really the driving factor there? And even with the soft macro environment, you have a [ store of ] steady share gains that you have for more consistent growth. Just trying to get your sense on whether or not we should be thinking automotive could be lumpy?

Yes, for the automotive in MPS, as you know, we entered the market about 4 or 5 years ago, and 4 or 5 years ago, our revenue almost 0. And even 2, 3 years ago very teeny, teeny, tiny. And it takes a long time to get the revenue. And so design cycle is about 3 to 4 years. And we are total TAM in automotive, it's about $6 billion, probably a little -- now they're more than that. And so what is our percentage? It's less than 1%. So it's a total greenfield for us to grow. So next -- as I see it, in the next few years, all the design win activities happened in the last couple of years. So it's all designed in unless they canceled a car. They canceled their entire cars and not going to move to a production, and of course, now we expected the MPS revenues. But it's highly unlikely they not introduce a car anymore. Yes, that's why we said, we -- and also at the same time, we're gaining the share. We're gaining share. We're entering other applications and we are winning other sockets. So the overall for us is very optimistic.

Great. Let's hope that there are no Samsung Galaxy Note7 automobiles coming to market anytime soon.

Our next question comes from Rick Schafer of Oppenheimer.

Maybe just a quick follow-up on Purley and Grantley. I'm just curious what your guys thoughts are and how you see that mixed migration and what it looks like over the next 12 to 18 months? I mean, are we going to -- is it a relatively rapid crossover just in mid -- possibly like the first half of 2018 or is it going to take a little while longer for that mix to shift?

I don't think there's going to be a very sharp crossover. So there will be a gradual and a gradual change. So our revenue, as I said, again, in the last few quarters, so the second half of this year will start to gradually see revenue coming.

And I think I would add to that, that a lot of the initial revenue will come from similar dollar content as we have in the Grantley cycle, and that is based on the POL and the E-Fuse opportunities and then we'll continue to gradually layer in our next generation as far as power management, the QSMod, over the next -- the course of the next 2 years. So I think that Michael has summed it up nicely that we see a steady ramping in that for us.

Again, the opportunity for us in a cloud computing is well over $1 billion. And we have a very -- a few -- I don't know what is the percentage. It's less than a couple of percent.

And maybe just to follow on to that, I mean, how do you guys feel like you're positioned with ARM servers for core-power, or for -- or point-of-load or E-Fuse, do you expect any revenue or you work on any projects along those lines in the next -- same kind of time frame, next 12, 18 months?

Of course, we want to cover everything. If we entered the market, okay, we are with our technologies and we can be easily adopted into different platforms. And so we're working on it, all these other solutions, and a lot of them we already have it now.

Okay. And then maybe just on the -- on switching gears to e-commerce and the initiative there. Maybe you could -- first, I guess, is the website live and is it up and running? Now I know you talked about sort of March, April time frame for launch. Maybe if you could remind us or kind of frame out how big that opportunity is in terms of potential new customers and when we might start to see revenues from that effort?

Yes, I will open up by saying that the e-commerce solution and the opportunity that is reported through field programmability. And we've been viewing that really as the second half of 2018 and 2019 as far as when the revenue ramp begins. So to answer your question specifically, this quarter, we did have a rollout of basically an upgrade over our old website. And then we're expecting in about another 3 to 4 months time that will go up with the first generation of the NexGen website, which will have an e-commerce component.

This upgrade, and okay, it's a very -- okay, it's -- I call it baby steps. It's just we show we have other components and okay and all the interactive and the e-commerce portion hasn't really kicked in yet. And I hope in the next few months, okay, the new website will be live.

Our next question comes from Ross Seymore of Deutsche Bank.

This is actually Matt on Ross' behalf. I'm curious about 2 end markets in particular, comms and storage and computing. It looks like they were just a tad bit softer than at least we expected. Was there anything beyond your prepared remarks that could explain the directionality of those 2? And it sounds like that you're pretty optimistic about both of them in the second half but anything you can talk about, one, in the near term, and two, anything over and beyond what was already answered from the previous caller concerning the long term?

Yes. So let me address, just focusing quarter -- year-over-year on the quarter's performance. So the computing -- storage and computing revenue for that market went up 34% year-over-year and a lot of it was driven by storage, SSD in particular. And it's like it offers sort of a thought is that storage for us has been somewhat constrained because of lack of availability of NAND. And we had a very good bump and we expect that to continue for the next several quarters, as there have been certain of the larger suppliers that have been able to extend greater availability. And so that's removed the bottleneck for us. And then, as far as the server and the notebook, notebook, we are benefiting as we transition from Skylake to Kaby Lake and that is going to increase the number of OEMs that we serve, and actually increases it by, I believe, 5 or 6, and we expect that to ramp incrementally right now, but have continued growth through the remainder of this year and well into next year. And likewise, I think we've already addressed the server, which is going to be driven by the Grantley, Purley conversion. On the comms market, I think we've sort of had a very consistent theme that we are very enthusiastic about the opportunity there. We believe that the field programmable solutions for power management that we have are ideally suited, particularly for high-voltage opportunities in the wireless infrastructure. But that is a long-term proposition. And so quarter-to-quarter, we expect the comms market to sort of increase or decrease by a margin of about $1 million until we really start to get some traction in the next generation products and new customers.

Yes, as I said, we're going to introduce some great products and that killer product is out. We already introduced. And I expected to have the next couple of years that we're going to grow that business significantly.

Okay, great. And on the OpEx front, could you give any rough color on the second half outlook? It sounds like -- again, we talked about the growth drivers ad nauseam, but just a rough idea of what OpEx should do in the second half of the year?

Sure. I think that we said in the last call that we expect to be within our financial model growing operating expenses in this year at a rate that represents 50% to 60% the rate of revenue growth. In Q1, we actually came in middle, low end of that point. And I'd sort of say that we're targeting plus or minus 2 percentage points as a midpoint of that for the full year.

(Operator Instructions) Our next question comes from the line of Tore Svanberg of Stifel.

My first question is for you, Michael, on all the consolidation we've seen so far, especially on power management companies. I'm just wondering if things have changed in the marketplace, whether it's pricing or capacity, because it seems like your competitors are getting gobbled up every quarter now. So any thoughts on that would be helpful.

I think that we gained a lot of large -- these are first tier customers in the recent years. I think that attributes to, I will say, the first, our technologies, and secondly, I think yes, I do agree there is some effect. And our customers need multiple sources and the sources had kind of dried out. So it kind of forced them to looking into another supply. And combination with both, I think we gained a lot of recognition in the last couple of years. And particularly, the very well-established first-tier customers in auto and in industrial side.

That's helpful. And on the high-end notebooks, other than the processes have changed, is there anything about the power management architecture there that's allowing you to gain some incremental share?

I think for the high-end notebooks, okay, we are -- well, I can say now we can provide the total solutions for the power management. And so obviously, in other peripheral, we can gain some more shares. But we don't want to associate it to MPS as a notebook company and we only adjusted that those are small, very thin, very portable and long battery running times.

Yes. And then on the industrial side, which obviously had the strongest growth over the last 12 months. Any further thoughts on the distribution strategy? There seems to be some mixed strategies out there. Some companies are relying less on distributors; some are kind of stepping them up. Where do you stand as far as leveraging the distribution channel in the industrial market?

Yes, we -- in the past, and like our sales guys are really have -- did a hard work as they're pounding the pavement to get our customers' attention. And all these distributors, just frankly, just ignore us and now, they have run out of source, they come to us too. And so I think as they will be going to futures in the next couple of years, so we have a huge benefit to MPS.

Very good. Just one last question for Bernie. Bernie, the inventory days went up a little bit sequentially. I understand it tends to do that in the March quarter, but anything else going on there? Is it basically just getting ready for a strong period in Q2, Q3?

Tore, that's exactly it. I think that as you look at the market, that fab capacity is being mentioned as a concern for some people. And I believe we've positioned ourselves very well to manage the growth that we expect to get in the second half of this year.

At this time, I'd like to turn the call back over to Mr. Blegen for any closing remarks. Sir?

Sure. Thank you. I'd like to thank you all for joining us for this conference call and look forward to talking to you again during our second quarter conference call, which will likely be at the end of July. Thank you, and have a nice day.

Ladies and gentlemen, that does conclude your program. Thank you for your participation, and have a wonderful day. You may disconnect your lines at this time.