芯源系統 (MPWR) 2017 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Monolithic Power Systems' Second Quarter 2017 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, sir.

Thank you very much. Good afternoon, and welcome to the Second 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 Q2 earnings release and in our SEC filings, including our Form 10-K, filed on March 1, 2017, and Form 10-Q, filed on May 5, 2017. 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 measurements to GAAP financial measures is included in our earnings release which we have filed with the SEC. I would refer investors to the Q2 2016, Q1 2017 and Q2 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 one year, along with the earnings release filed with the SEC earlier today.

MPS had a record quarter with revenue of $112.2 million, 11.8% higher than revenue generated in the first quarter of 2017, and 19.3% higher than the comparable quarter in 2016. MPS continues to benefit from technology leadership and our diversified multimarket strategy.

Looking at our revenue by market. In our computing and storage market, revenue of $24.5 million increased $6.2 million or 33.7% year-over-year, reflecting strong sales growth for SSD storage, cloud computing and high-end notebooks.

Computing and storage revenue represented 21.8% of MPS's second quarter 2017 revenue.

Second quarter automotive revenue reported separately from industrial for the first time of $12.9 million, grew 55.7% over the same period of 2016, fueled by product sales for applications and infotainment and lighting. Automotive revenue was 11.5% of MPS's total Q2 2017 revenue.

Revenue from consumer markets increased 14.6% over the second quarter of 2016 to $43.9 million, and represented 39.1% of our Q2 revenue. The year-over-year revenue increase reflected solid improvements in high-value consumer markets including gaming and home appliances.

Second quarter 2017 communications revenue at $15.9 million, increased 9.0% from the second quarter of 2016 and represented 14.2% of our total second quarter revenue.

GAAP gross margin was 54.7%, 10 basis points higher than the first quarter of 2017, and 60 basis points higher than the second quarter of 2016.

Our GAAP operating income was $15.0 million compared with $13.6 million reported in the first quarter of 2017, and $11.5 million reported in the second quarter of 2016.

For the second quarter of 2017, non-GAAP gross margin was 55.6%, 10 basis points higher than the first quarter of 2017, and 50 basis points higher than the second quarter from a year ago.

Our non-GAAP operating income was $31.2 million, compared to $26.5 million reported in the prior quarter, and $24.1 million reported in the second quarter of 2016.

Let's review our operating expenses. Our GAAP operating expenses were $46.5 million in the second quarter, compared with $41.3 million in the first quarter of 2017, and $39.4 million in the second quarter of 2016.

Our non-GAAP second quarter 2017 operating expenses were $31.2 million, up from the $29.2 million we spent in the first quarter of 2017, and up from the $27.2 million reported in the second quarter of 2016.

On both a GAAP and on a non-GAAP basis, second quarter litigation expenses were $290,000, compared with $286,000 expense in Q1 of 2017. The differences between non-GAAP operating expenses and GAAP operating expenses for the quarters discussed here are stock compensation expense and income or loss on an unfunded, deferred compensation plan.

Total stock compensation including approximately $450,000 charged cost of goods sold for the second quarter of 2017 was $15.1 million, compared with $11.7 million recorded in the first quarter of 2017.

Switching to the bottom line. Second quarter 2017 GAAP net income was $15.0 million or $0.35 per fully diluted share, compared with $0.33 per share in the first quarter of 2017 and $0.27 per share in the second quarter of 2016.

Q2 non-GAAP net income was $29.5 million or $0.68 per fully diluted share compared with $0.58 per share in the first quarter of 2017 and $0.54 per share in the second quarter of 2016.

Fully diluted shares outstanding at the end of Q2 2017 were 43.4 million.

Now let's look at the balance sheet. Cash, cash equivalents and investments were $283 million at the end of the second quarter of 2017, compared to $284 million at the end of the first quarter of 2017.

For the quarter, MPS generated operating cash flow of about $24.9 million compared with Q1 2017 operating cash flow of $21.9 million.

Second quarter 2017 capital spending totaled $17.1 million.

Accounts receivable ended the second quarter of 2017 at $42 million, or 34 days of days sales outstanding, compared with the $38.1 million, or 35 days reported at the end of the first quarter of 2017.

Both quarters experienced a modest increase over a historic norm due to a higher proportion of the quarter sales being recorded in the third month of the quarter.

Days sales outstanding for the second quarter of 2017 were 4 days higher than the 30 days posted in the second quarter of 2016.

Our internal inventories at the end of the second quarter of 2017 were $92.7 million, up from the $78.5 million at the end of the first quarter of 2017. Days in inventory increased to 166 days at the end of Q2 2017 from the 157 days at the end of the first quarter of 2017, and 147 days at the end of the second quarter of 2016.

I would like to turn to our outlook for the third quarter of 2017.

We are forecasting Q3 revenue in the range of $124 million to $128 million. We also expect the following: GAAP gross margin in the range of 54.4% to 55.4%; non-GAAP gross margin in the range of 55.2% to 56.2%; total stock-based compensation expense of $13 million to $15 million, including approximately $450,000 that would be charged to cost of goods sold; litigation expenses ranging between $250,000 to $350,000; GAAP R&D and SG&A expenses between $43.8 million and $47.8 million; non-GAAP R&D and SG&A expenses to be in the range of $31.2 million to $33.2 million. This estimate excludes the stock compensation and litigation expenses.

Other income is expected to be in the range from $650,000 to $750,000 before foreign exchange gains or losses.

Fully diluted shares to be in the range of 43 million to 44 million shares before share buyback.

In conclusion, we continue to execute against our long-term business strategy and believe the success of our new product development will further propel MPS's future growth.

I will now open the phone lines for questions.

(Operator Instructions) And our first question comes from the line of Tore Svanberg with Stifel.

My first question is on the outlook for the September quarter. Could you maybe talk a little bit about what are some of the main growth drivers for the quarter? I know you have a couple of specific product cycles coming up. But if you could just add some color there, that would be great.

Sure, Tore, thank you very much. So as you know, Q3 tends to be a seasonal quarter for consumer and we're seeing good traction, are anticipating good demand actually in several of our different product lines -- market segments there.

In addition, we believe that automotive is going to continue to do very well. And then also, we have a number of areas in computing, they're going to be continuing strong into Q3.

Very good. And I noticed that your inventory days, I think you said are 165 days now. So is that purely a reflection of the demand that is coming in the second half of the year? Or is this more sort of a long-term project for you to keep the inventories or the inventory days just this elevated?

Yes, I think that about a little over a year ago, that we started to slowly elevate our inventory levels as we introduced a lot of new products for -- designed for new markets. And then as we're looking at entering the second half of the year, there had been concerns about SAB capacity, and so we wanted to get ahead of that so that we were able to meet demand. And so that has reflected in our inventories as they stand today. We expect them to exit the quarter probably about the same -- a similar level, but then come down probably in the subsequent quarters.

And another factor is that we -- all these greenfield market segments which are much higher levels and higher quality than the -- in the past -- 5 years ago, those were more consumer-oriented. Now in the industrial, automotive and the cloud computing and those customers require us to carry a higher -- high inventory.

Very good. And last question also for you, Michael. Could you give us an update on the website? And if we're going to see a launch here pretty soon?

Yes. If you look at our website now and that really changed. MPS is transitioning from selling ICs, now we're selling solutions. Again, of course, is based on the ICs. And we will sell a lot more higher content other than MPS product and that's included into -- in our solutions. Now you look -- log on our MPS website, you will see it. And -- however, the -- we -- the MPS in the past is always a hardware company. Now we are doing a lot more software, a lot more Internet development and it's a little bit slower than I thought. But our website will be launched in the second half of this year. That would be a --

so the -- in addition, what we have now -- it's actually is a bigger part of our e-commerce business, is that the interacting with the users. And that the users start to order parts and also configure parts from our website. So we'll see it in the later second half of the year.

And our next question comes from the line of Quinn Bolton with Needham & Company.

Just wanted to come back to automotive. Obviously, you guys are seeing strength. I think one of your larger competitors, Maxim was talking about perhaps a little bit of a slowdown in their markets. So wondering what's giving you a better outlook than perhaps some of your peers? Do think it's just strength of your design wins going to production? Are there pockets of automotive where you're perhaps seen strength where maybe competitors are not as well positioned? Just any thoughts you might have on that. Then I've got a couple of follow-up questions.

Yes, Quinn, Michael. In automotive segment, we are so new and we haven't really scratched the surface. So our growth should be regardless what the automotive industrial conditions. And so our revenues, our opportunity, the ratio is very, very high. So, in that case, we have a lot of opportunity to grow.

Okay, great. And then just looking at the compute strength. Probably it was just launched a couple of weeks ago. Obviously, that's a big power management cycle for you. Wondering now that we've had the official launch of Purley, how you're looking at the ramp in the server power management into the second half of 2017 and into '18 as well?

I think now you see we move the needles. We'll move the revenue needle noticeable. And in the next years, we probably grow at a similar rate, or even higher.

And I think one of the interesting components here is that we're getting significant contribution from storage, primarily SSD as well as the high-end notebooks and we're only at the very early stages of the Purley conversion. So to echo Michael's point here, we see this being able to develop over the course of the next 12 months.

Okay, great. And then just lastly just for the capital returns, you guys have done a very nice job growing EPS reported $0.68 this quarter. Cash dividend has been sort of flat at about $0.20 a quarter since I think the first quarter of 2015. Any changes in how you're thinking about that dividend and whether there's a chance that we could see that moving a higher over the next few quarters?

Quinn, we continue to look at our capital allocation model and it's something that we're mindful of as far as what our investor feedback is, as well as what we think is best as far as the cash management for the company. So at this point, again, it's under evaluation but there is no firm direction.

Great. And then just, sorry, last quick clarification, Bernie. The CapEx seemed to be much higher this quarter than in a typical quarter for MPS. Was there a big outlay for testers? Or what was behind that jump in CapEx? I assume it's probably temporary.

We had a lot of automotive qualification as well as industrial and the cloud computing. And a lot of qualification equipment we had to buy.

We've also, as you know, been buying office space over time and that contributed as well.

And our next question comes from the line of Anil Doradla with William Blair.

First question. If you look at Q1 and Q2, it was close to 19% year-over-year growth. If I look at the high end of your guidance, that suggests about a 20% year-over-year growth. Now I know, Michael and Bernie, you guys have talked about aspiring to get to 20%. And without talking too much about Q4 and everything, but just qualitatively, could we even potentially exit this year at a 20%? I mean, is that realistic? Or maybe that's more kind of a -- it spills over into next year?

That's a very, very possible. As I said about a year ago or so, this year, we see some of the greenfield market segments that we entered in the last 2 or 3 years, or 3 or 4 years ago. And this year, we start to see it -- see the revenues. So the -- it's only a few percentage change. It doesn't mean to me a lot.

Yes. I think that the substance that we're really looking at and while certainly the 20% is a number that we've had in our long-term guidance, but it really is the quality of the new product launches and how successful that they're being viewed that we're very interested in. And all of the initial signs as far as both the demand and acceptance in the market has been very, very positive.

Yes. I don't look at, was it 19.5% or 18%, 21%. These are -- 20% seems to me as a psychological barrier and I don't get it. Okay.

Right, right. Well, it is definitely impressive. And as a follow-up, Michael, you talked about the e-commerce platform. Obviously, there is some resources and energy are being allocated to that. So Bernie, whenever you have the e-commerce development platform, is that part of the R&D spending or is that part of as SG&A? And if I look at the next 12 months, how should I be looking qualitatively at the growth of SG&A versus R&D? Should SG&A revert to higher growth rates than R&D given some of these initiatives? Just a qualitative kind of a feel?

Sure. The e-commerce is part of our R&D spend. And I think that you're fairly comfortable with our management of operating expenses. And while we have significant opportunities ahead of us that we want to invest in including the e-commerce platform, I think that we've always demonstrated a strong discipline, particularly on the G&A side.

And our next question comes from the line of Rich Schafer with Oppenheimer.

I guess my first question is, could you talk a little bit about your new gaming business? And how would -- how will it impact seasonality in your consumer segment in the second half? I mean, should we expect sort of the typical fourth quarter slowdown? Or is there still enough ramp left to blow through that a little bit? Or could you just give us some color maybe on the consumer segment?

Yes. Again, we don't offer guidance more than one quarter ahead. So I'm not going to try and add too much color that would give away any thinking there. But I will say that there's nothing currently when I look at what the analysts and how you have us modeled out, there is nothing in the -- that cycle that gives me pause.

Okay. And then within computing storage, if you had to, how would you rank the growth? Maybe the second half or in 2018, if you're ranking growth sort of between server and notebook and the SSD business.

Well, I think that it's hard to actually rank them because a lot of the parts have so much similarity that we kind of make a very educated guess as far as which end market they go into. But I think that server, which is just being introduced right now with Purley, probably would be the #1 grower over that course of the next 12 to 15 months. And then SSD really has only been limited by NAND availability. And because that transition away from HDD has been very clear and apparent to the marketplace. So we see that continuing to go. And then high-end notebooks, we have such an under-penetrated position that we see that all as upside. And that probably would be sort of my rough ordering of it.

Probably #1 is the server. Products we're selling to servers and the computing and the desktop, I mean not in the workstations and the servers and the high-end PCs, these are very much -- a lot of them are convoluted. But I would correct Bernie, the SSDs, they're different products. So if you rank them, so I think the servers on the highest, and then probably SSDs, we grow the second, yes.

Got it. And then maybe just one follow-up on servers. Can you talk about any new server customers that come on with Purley? And maybe would they be primarily point of load and E-Fuse type of customers? Or could they take U.S. mods out of the gates as well?

Yes. Our servers are just the very beginning. And the significant growth will be 2018 and 2019 for MPS.

(Operator Instructions) Our next question comes from the line of Ross Seymore from Deutsche Bank.

Just on the computing side. Mike, earlier you said a comment about the business staying strong growth rate-wise and maybe even accelerating going forward. Without pegging you down to anything too specific, were you referring to the growth rate this year going into next year? Or was that a comment that was more specific about the year-over-year growth rate in the second quarter alone?

No. Listen, I'm talking about year-over-year growth rate. Not growth rate, the absolute numbers will be a significant portion of the MPS revenues. So looking at what kind of products. This year is mainly ramping up from a point of load E-Fuse and some portion of core power. And the next couple of years, the core power will start to ramp. And now we have all the first tier customers.

We're in the very early stages, particularly in the server workstation as far as being able to grow and develop that market.

Great. And I guess following on with the new product side of things. You've talked about the OpEx being a little bit higher because you have so many new products coming on, so many new end markets you're gravitating towards. Do you expect in general for these markets to generate revenue in kind of a consistent steady, might improve a little bit or slow a little bit year-over-year but more of a steady pattern? Or is there going to be a time where you're going to have numbers that are significantly above what we view as seasonal patterns because these new products really kick in? And it's not meant to be a single quarter comment, Bernie, because I know you don't want to comment on 4Q or any other thing beyond that.

No, no, no. I think that one of the things that we're known for here is our level of predictability. Even managing a level of higher growth -- significantly higher growth than the market is enjoying. And within that, we're not looking for seismic shifts that create a hockey stick, but we want to do is a groundswell where we continue to grow and we look at it over a 2- or 3-year horizon, not just how can we get to next quarter.

Ross, look at the market segment that we entered and we really announced about five years ago. And those are very slow-changing markets and the customers will not design us out in a couple of years. Not in five, six years, these are 10 years plus. And that takes -- the cycles take that long. So nothing changes very quickly. So once we roll out all these products, the doors are open to MPS now and we need to grab all these (inaudible). So we will see some acceleration growth but very steady state.

Got you. I guess my follow-up or my final question is one on the gross margin. You guys have had steady, predictable execution on that, to use your words, Bernie. With these new markets kicking in and becoming a bigger percentage of your revenue over the course of the back half of this year and even more so in the next year, 1.5 years. Does that change any of that kind of 10 basis points per quarter trend? Does it accelerate it, decelerate it? Any change whatsoever?

The advantage of some of these new markets that we're developing in, they have much longer lead times. And so what we're able to do is as we're looking even 2 quarters out, we have a very strong sense of what the sales mix is going to be. And if there is an opportunity introduced lower margin business as a means of accelerating revenue growth and also continuing to increase gross margin by 10 to 20 basis points quarter-over-quarter, that's what we're trying to do. So in the -- if we have the good fortune of having very high margin business come through, what we will probably do is level it out with lower margin business in order to get a higher overall growth rate.

And that concludes our question-and-answer session for today. I would like to turn the conference back over to Monolithic management for any closing comments.

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 third quarter conference call which will likely be at the end of October. Thank you. Have a great day.

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.