芯源系統 (MPWR) 2017 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Monolithic Power Systems Inc. Q3 2017 Earnings Conference Call. (Operator Instructions) And as a reminder, this conference call is being recorded. I would now like to introduce Mr. Bernie Blegen. Sir, you may begin.

Thank you very much. Good afternoon, and welcome to the Third Quarter 2017 Monolithic Power Systems Conference Call. In the course of today's conference call, we will make forward-looking statements and projections that involve risks 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 our Form 10-K, filed on March 1, 2017, and Form 10-Q, filed on July 31, 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 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 2016, Q2 2017 and Q3 2017 earnings 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.

This was a record quarter for MPS with revenue of $128.9 million, up 14.9% from the previous record set in Q2 of this year and up 21.1% from the comparable quarter in 2016. In addition to the continued strong sales momentum in Cloud Computing and Automotive, this quarter's results included the first full quarter of revenue from our Power Management Solutions for gaming consoles.

Looking at revenue by end market. Revenue from consumer markets increased 26.8% over the third quarter of 2016 to $55.3 million. The year-over-year revenue increase reflected sales gains in high-end consumer applications. Consumer revenue accounted for 42.9% of our total Q3 revenue compared with 41.0% in the prior year.

Third quarter automotive revenue of $12.9 million grew 48.8% over the same period of 2016, as a result of increased sales of infotainment, safety and connectivity applications -- application products. Automotive is MPS' largest SAM opportunity at $6 billion, and we are in the early stages of penetrating this market. In the years ahead, we plan to offer a number of new products for applications in body controls, lighting, infotainment and ADAS.

Automotive revenue was 10.0% of MPS' total Q3 2017 revenue compared with 8.1% for Q3 2016. In our computing and storage market, revenue of $29.0 million increased $5.6 million or 23.7% year-over-year, reflecting strong sales growth for cloud computing. MPS has experienced a significant increase in product sales reflecting both new design wins and increased dollar content.

Computing and storage revenue represented 22.5% of MPS' third quarter 2017 revenue compared with 22.0% in Q3 2016. Third quarter 2017 industrial revenue of $16.3 million increased 12.6% from the third quarter of 2016, primarily due to increased sales for AC/DC power applications. This market represented 12.7% of our total third quarter revenue versus 13.6% for the prior year. GAAP gross margin was 55.0%, 30 basis points higher than the second quarter of 2017, and 60 basis points higher than the third quarter of 2016.

Our GAAP operating income was $23.8 million compared to $15.0 million reported in the second quarter of 2017 and $15.0 million reported in the third quarter of 2016.

For the third quarter of 2017, non-GAAP gross margin was 55.7%, 10 basis points higher than the second quarter of 2017 and 40 basis points higher than the third quarter of 2016. Our non-GAAP operating income was $38.9 million compared to $31.2 million reported in the prior quarter and $29.4 million reported in the third quarter of 2016.

Let's review our operating expenses. Our GAAP operating expenses were $47.0 million in the third quarter compared with $46.5 million in the second quarter of 2017 and $42.9 million in the third quarter of 2016.

Our non-GAAP third quarter 2017 operating expenses were $32.9 million, up from the $31.2 million we spent in the second quarter of 2017, and up from the $29.4 million reported in the third quarter of 2016.

The year-over-year increase in operating expenses primarily reflects investment in new product introductions and staff additions in support of targeted sales and marketing efforts.

On both the GAAP and the non-GAAP basis, third quarter litigation expenses were $327,000 compared with $290,000 expense in Q2 2017, and a $55,000 expense in Q3 of 2016. The differences between non-GAAP operating expenses and GAAP operating expenses for the quarters discussed here are stock compensation expense and income or loss from an unfunded deferred compensation plan.

Total stock compensation expense, including $453,000 charged to cost of goods sold for the third quarter of 2017 was $14.0 million compared with $15.1 million recorded in the second quarter of 2017.

Switching to the bottom line. Third quarter 2017 GAAP net income was $23.6 million or $0.54 per fully diluted share compared with $0.35 per share in the second quarter of 2017 and $0.34 per share in the third quarter of 2016. Q3 non-GAAP net income was $36.6 million or $0.84 per fully diluted share compared with $0.68 per share in the second quarter of 2017 and $0.66 per share in the third quarter of 2016. Fully diluted shares outstanding at the end of Q3 2017 were $43.5 million.

Now let's look at the balance sheet. Cash, cash equivalents and investments were $305.0 million at the end of the third quarter of 2017 compared to $283.0 million at the end of the second quarter of 2017. For the quarter, MPS generated operating cash flow of about $33.7 million compared to Q2 2017 operating cash flow of $24.9 million. Third quarter 2017 capital spending totaled $4.6 million.

Accounts receivable ended the third quarter of 2017 at $50.8 million or 36 days of sales outstanding compared with the $42.0 million or 34 days reported at the end of the second quarter of 2017.

Days of sales outstandings in the third quarter of 2017 were 8 days higher than the 28 days reported in the third quarter of 2016.

Our internal inventories at the end of the third quarter of 2017 were $99.9 million, up from the $92.7 million at the end of the second quarter of 2017. Days of inventory decreased to 156 days at the end of Q3 2017 from 166 days at the end of the second quarter of 2017, but were higher than the 133 days reported at the end of the third quarter of 2016.

I would now like to turn to our outlook for the fourth quarter of 2017. We are forecasting Q4 revenue in the range of $123 million to $129 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 $500,000 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 $44 million and $48 million; non-GAAP R&D and SG&A expenses to be in the range of $31.5 million to $33.5 million. This estimate excludes stock compensation and litigation expenses.

Other income is as expected in the range from $600,000 to $700,000 before foreign exchange gains or losses. Fully diluted shares to be in the range of 43.7 million to 44.7 million shares before any share buyback.

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

I'll now open the phone lines for questions.

(Operator Instructions) Our first question comes from the line of Anil Doradla with William Blair.

Now a couple of questions. So obviously, you're talking about the data center and some of these design wins, Michael. But can you give us some update on kind of the pipeline of design wins and kind of the opportunity that you have here.

We have many of them. And some are small, some of them big. Of course, the bigger one now, we don't want to disclose that on the Internet or to anybody. And so overall, I can tell you everything doing well. We are doing expected -- better than what we expected.

And on the e-commerce platform, I know this is something that you guys have been looking at in the long term. But any updates here?

On the e-commerce, we, well, we -- it's a bigger project. And obviously, you haven't seen our new website launched yet. And - but we still expect at the end of the year. The key is all the contents. And we're working very hard to -- with the limited resources. And -- but it's going to be some times next year, some of you will see something new.

And again, Anil, here. Just to set expectations is we're probably most excited as far as developing the new sales and marketing channel through this e-commerce platform, particularly, as it relates to our field programmable power modules. But we wanted to keep expectations at a relative level. So in the initial stages here, we're going to be taking customer feedback as far as their user experience and also how valuable they find the content. And then we're going to inner-rate the website in order to be able to take into account that feedback. And we're really looking for sales to really start to ramp in probably about another 2 years out. But we do believe that we'll be able to go live with this by the end of this year.

Well, that's well said. I think user experience is everything. And we don't want to have some things that cripple out -- just put it out there. And then we go just very cautiously. And I think it's a -- to enter with all the breadth of a -- to enter this market with the breadth of a product behind it. User experience is everything. But I think that we're still pretty much on times. And next year, you will see a first line of a product we put out there and then we gradually eroding -- put out on the other product. The first line of a product that we talk about before is a programmable DC-to-DC, converter modules.

And our next question comes from the line of Ross Seymore with Deutsche Bank.

This is Jeriel Ong, on behalf of Ross Seymore. Just a few from me. And the first one, just want to go over a little bit -- into a little more detail about your recently disclosed automotive group. So the year-on-year growth appears to be declining every quarter. And just want to get a sense of, what is the rate that do you think this business could grow over the next 2 or 3 years?

I think as Bernie said, and we are adjusting this one the current product served the market is about $60 billion. So we are at the very, very beginning. So I can't quantify exactly what the number is. But the growth rate will be kind of similar to the current growth rate. And it may be okay, over a couple of hundred million dollars, or we slow it down a little bit. But I just give you a -- my -- all these numbers I'm just pulling out from my hairs.

Actually, he's got a good head of hair, too.

I do have a lot of hair.

So just to add to that, I think that the exciting part for us is that we're able to work across so many different verticals within Automotive and certainly across all the different geographies with the different OEMs. So we see this as an opportunity that has legs for growth for the next several years.

Got it. That makes sense. It's only 10% of your revenues anyway. So you would think that other guys are at 20%. So there's definitely room for growth.

I think that yes, other -- as -- and well said too. In our other market segments grows pretty -- in a consistent speed in the last 5, 6 years. And Automotive's in a growth that's slightly faster, but it's start from a very small numbers. And once you get to $100 million to $200 million levels and again, I think the growth rate will be very, very similar to the rest of the quarter average.

That makes sense. Moving onto storage and computing. The segment, at least for the third quarter came in slightly below our model. Could you talk about how the Purley ramp is trending and the impact to your company and how long you expect that to last?

Yes, I think that the opportunities for us in the compute and storage are very exciting. And I don't think that you can look at a individual quarter and sort of use that as a milestone for the success of what we're seeing. I think that we were very clear that we have 2 opportunities that are driving this new growth, particularly in the Cloud computing. And that has to do with increasing the number of overall design wins. And then also we're adding significant dollar content into the second-half-of-the-year sales. So from our perspective, actually, the rollout has been almost exactly to plan. And the prospects as far as what we see in the next 2 years seem similarly positive.

Well, it's not quite exactly that plain. I think it would delay it a year or 2 or so. And but overall, Automotive is -- Cloud computing is very similar to Automotive business, except we have only a few players in there. And other players are dominant in the market and we're not. We just entered. And our customer just accepted the last couple years, just barely accept our product. And this year, particularly, is really a good year for us. We have a new product introduced to this market segment, and we are ahead of everybody else. And now will give us the next couple years a very good growth.

And our next question comes from the line of Tore Svanberg with Stifel.

I think we're all excited about the growth, but I'm actually going to congratulate you on your 30% operating margin. So, well done there.

Thank you.

You're the first to notice that.

Well done. So my first question, Michael, you said that your design win pipeline is better than expected. Could you maybe elaborate a little bit on that? I mean, are you starting to see more customers coming to you? Or is it just because you've been able to introduce more new products?

I think in every segment is slightly different. In Automotive, we are more recognized and all the top-tier companies in the -- we're engaged now, with -- we -- before we have meetings and now, we engage you on the product level. And they open up to -- for MPS to quote -- to quoting the new product development, which is for 2019, '20, '21 revenue. And in the Cloud computing, I think we're ahead of a lot other people. And we introduce the products and meet all the order requirements or exceeded all these requirements and are very simple to use. And that attracts the customers open to us. In the first tiers and the customers -- first tiers of server makers and now, really opened up.

That's very helpful. And could you update us a little bit on your new foundry partner? I know you probably don't want to mention who it is, but maybe just give us an update on how that's going? Are you up and running? Is it starting to contribute to revenues yet?

Yes, so I think that you're familiar that we began to invest in this -- with this partnership back in late 2015 and early 2016 and through the following 18 months was a period of investment for us. And actually the results have been quite good. We're pleasantly surprised and it comes at a time where, certainly there are some concerns in the industry as far as capacity at the moment and we're not experiencing that at all. So I think that as far as the partner, that was very timely as far as when we added them, but also looking at the long, long-term relationship and being able to develop new technologies together, we're very encouraged.

Very good. Just one last question, and back to Michael. Can you -- I know you don't want to talk too much about your process technologies, but you must be working on the next one. And I know, obviously, you've been integrating more and more capabilities with that process. So is there anything that you care to share with us as far as what you're working on for the next-generation process?

Yes, we're moving on to a 12-inch fab, so that's obviously will not be ready for production next year. So we're looking for 2019/'20, which is also -- these 12-inch trading edge of most of the band circuit, not even talking about most of the bands. DMOS. So we will be keep upgrading our MPS capability.

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

Congrats on getting back to a 20% growth rate for the first time since I think early 2015. Good to see that 2-handle. Wanted to ask first, just as I look at Automotive business, it looks like you've kind of been hovering in the range of the low-12 to the higher $12 million per quarter range. So it looks like it's seeing a little bit of a flattening out here on a sequential basis over the last couple of quarters. On a year-over-year basis, it's still growing pretty nicely. How should we think about the growth in that business? It -- does it kind of come in phases or should we think it can be a more steady quarter-to-quarter type grower?

I will say the steady state, but you said it, okay, we're kind of flattening out. And we didn't grow as much, okay? We really haven't -- I haven't really looked into deeply. Maybe Bernie can answer question.

Yes, I think that in the past, we've discussed the fact that, while we're not immune to the macroeconomics because we're so small and new to the market, we have seen basically a step function in the growth here, where we will have a series of new product introductions that might be timed around a particular market -- model year. And then that step function of growth occurs and then you get a couple quarters where it -- you don't necessarily see the same rate of increase quarter-over-quarter, but certainly year-over-year, we've been generating results in excess of 40% annual growth year-over-year. So I think that it's not a perfect linear. It's not like a math equation. But I think a step function with the upward direction is the way to look at it.

Okay. So last year, it looks like you guys kind of hit that step function in the December and March quarters. Is that a fair way to think about maybe you kind of see that step function up with each new model year, and you tend to see maybe a little bit better sequential growth December into March? Or is it not necessarily timed to the same seasonality each year?

Yes, I think as I have to -- I have to say that before the product, I'm looking at the behavior of the product line. In last 2 -- last year or the year before that, all these product we generate -- all the revenue generated from the nonautomotive product and we requalify as automotive. In particular from this year, the new revenue generated, these are all specifically designed for automotive application. And we're going forward, these products, all the new revenues, all from this particular design for automotive products. So I would say there's a more consistent growth.

Okay. Great. And then just looking at the sequential growth you guys had a nice jump in the consumer revs as well as the compute. Just wanted to confirm, is that game console, the new game console included in the consumer and then, similarly on the Compute, was that mostly coming from the Cloud Computing or the Server Power management launch? Or did you see broader growth in the Compute segment in the September quarter?

You are correct that the power management solution for gaming...

The game console is my least favorite. That's my least favorite topic.

But it is in the consumer group. And then as far as the growth in Compute and Storage, I think that most of that was with Servers and Workstation. Cloud -- which we refer more broadly as Cloud Computing.

(Operator Instructions) Our next question comes from the line of Rick Schafer with Oppenheimer.

I guess, I just had a couple of follow-up questions on some topics that were raised earlier. The first is just on your e-commerce site. Could you maybe provide us a sense of how big that S&B opportunity is for you guys? Is there like a framework or some guidepost we could use to kind of think about how big that opportunity is for you guys?

I think it will be a few billion dollars. Because you think about all these company -- these -- that market, Simon (sic) [Rick], is all about underserved market. And you really require the FAE, like a field application engineer, it's a hand-holding on it. And secondly, it's a fast-time-to-market segment. And so we, initially, I think that would -- triggers down the -- the initial design, that will not sustain it. But our e-commerce model, our modules is open bill of materials. And customers initially buy our modules and -- for plug-and-play purpose and later on, we get the production they can buy our chip. And they can source in their own component. So by modules itself, you add all these together, the modules, all these customers, smaller customers. I think that total market is a few billion dollars for MPS. And we add more programmable capability and put on the Internet, I think that we should have a very good chance. I'm very optimistic about it.

Okay. And when -- should we think of the ramp there, once it starts to go as sort of a -- more of a linear ramp or do you think there's any kind of a step function there or anything as new features on the site come online or adoption takes hold? Or is it just too soon to kind of know how that's going to roll?

I think it's -- well, first thing's like we already launched (inaudible) and not on the Internet. We just sent them, as I stated before. I told you before we sent them a floppy disc, okay? So it's well received now when it came. And once you introduce it on the Internet, I wish the step function, but it's too early to call it.

Okay. And then just a quick follow up on the Auto business. Maybe, if you'd asked the question a little different way, but I think you've said in the past that your Autosum is roughly $200 a car today. I believe that's correct.

Actually, it's a little less than that. It's a $145 or $150.

Okay, okay. So what is your -- how does that compare with your actual average content then today. And maybe what is that going to look like in the next, I don't know, year or so, based on the design wins that you guys see coming down the pipe?

Again, let me take a quick stab at this. When you look at the potential of analog and sensor electronics in each automobile, you win an individual application or a socket. It's not like you get a 100% adoption in that. So in the area that we're -- have been launching, which has been a combination of infotainment inclusive of USB ports, I think that we've actually seen very, very good penetration, but it's spread out with just a few dollars of content per individual automobile. And then, as we do additional vertical product releases and go into the lighting, the body and controls, and ADAS, then I think you will see opportunities for multiple adoptions which will, by nature, increase the dollar content per car.

Got it. And then maybe my just -- my last question is you guys have been growing cash so nicely. Maybe Bernie or Michael, if you guys could discuss sort of what the top uses of cash here are for you guys? I mean, are we -- is it more apt we're going to see a raise in the dividend at some point? Or are you looking more at buyback or sort of how are you thinking about uses of cash?

We are looking for all the scenarios, all scenarios being considered. And as we always said and we're looking for some small tuck-in type, complementary technology company.

And our next question comes from the line of Amit Chandra with Wells Fargo (sic) [Wells Capital Management Incorporated].

Bernie, just a quick follow up. With inventory increasing sequentially each quarter in 2017 to support your strong second half product ramp. When do you expect inventory levels to start to normalize? Would that be in the March quarter of 2018?

Yes, let me process this by the reason that we've invested in inventories is because we had some very unique, new business opportunities as far as developing power management solutions for Cloud Computing, for Gaming and for high-end PCs. And during a time where capacity has been a question mark, we've actually been able to do a really good job, a very good job of meeting our customers' demands. But obviously, our intention is not to stay at an elevated level, but as you said, to normalize. In the past that we have tried to target a range between 135 to 155 days for inventory, and I would see us being able to bring that back more into a, not a historic level, but within that range, probably in Q2 or Q3 of next year.

Okay, that's helpful. And then as a follow up. You guys are guiding to really strong year-over-year growth in the December quarter. Just -- out of curiosity, has that driven more by -- more so by the Purley product ramp, or more by the Kaby Lake processor transition, or is it mostly the new Game Console business, or a combination of all 3, or is there something -- another...

A combination of more than 3. Combination of all above that we said in this conference and also that Bernie said in his script. And don't forget about consumer. And we grow and percentage-wise, it's not big, but the revenue side, they're big. Pretty sizable.

If I can add one comment that is, we're really trying to be a diversified company and the way that we differentiate ourself is with unique technology. And so I think that what you're seeing as far as the acceleration of our rate of revenue growth, it's been acceptance of that technology by our customers for their applications.

Okay, great. And then Michael, one final one for me. Can you give us a sense of how your single-chip solution for battery management content is tracking for electric vehicles?

Yes, that -- it's on schedule. And we do some field testing now.

And our final question comes from the line of William Stein with SunTrust.

I joined a little late, so I apologize if this is already asked. But I'd love to get an update on e.Motion. If you could remind us, sort of, how big that business is for you now? And are there design wins that are coming into the market and generating revenue currently and over the next couple of quarters and any sort of elaboration on that business will be helpful.

Yes. Okay. Thanks for raising the question. In the last few earnings calls, and I say all this didn't grow as expected because I didn't look at it. And actually this product line grows really well. And we will have more than a few-million-dollar business in next years. And also the fully integrated the product and we are launching it -- actually we have -- a lot more focus as a launch as a module, as a small model. And we will sell with the models and so we are partnered with a couple of model companies and with our module behind the models. And so in the first way, we introduce -- we have many design wins since last -- since this March. And I think that we have a lot more. And you're talking about really a revolution ideas in -- to replace the stem models, replacing all the BSP controls as well as optical sensors. And so it will be -- the acceptance will be a very -- for particular applications. But when -- once we, for a few larger segments start it and like robots and like warehouse robots and that will widely spread.

Maybe just one level deeper in the same topic. I think the somewhat unusual go-to-market approach is you're trying to get these components designed in by OEMs, who would have otherwise went to motor companies to buy a motor. And I think you're, correct me if I'm wrong, but I think you're going to customers and telling them basically, "Build your own motor or a better motor using our components." Is that right -- is that -- are you seeing sort of acceptance based on either performance or pricing or both?

I think it's a -- go-to-market segment, it's like the MPS selling DC to DC. Now we're selling modules. We're selling modules for underserved customers and for time to market. And for the higher -- when the volume reach high they can source there, the MPS IC, you can buy MPS IC. For the model, for this e.Motion product line, we will do it very similar, except in the industry now we do a model. We partner it with the model makers. Really depend on customers' needs. Where they can buy our modules, they can buy our chip. And the key is, I think that at this times -- and the customers have a hard time to understand that. They're like, "Why -- again how to use this product." because we get rid of the optical encoders. And it has a new way of controlling the models. So we help them to design their modules. And also we help them to select the models with our model maker partners.

And this does conclude today's Q&A session. I would like to return the call to Mr. Bernie Blegen for any closing remarks.

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 fourth quarter conference call, which will likely be in early February. Thank you. Have a nice day.

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