芯源系統 (MPWR) 2018 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Monolithic Power Systems, Inc., Q1 2018 Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to introduce your host for today's conference, Bernie Blegen, Chief Financial Officer. You may begin.

Great. Thank you. Good afternoon, and welcome to the First Quarter 2018 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, 2018, which is accessible through our website, www.monolithicpower.com.

MPS assumes no obligation to update the information provided on today's call. We'll 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 2017, Q4 2017 and Q1 2018 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 yet another record first quarter with revenue of $129.2 million, 28.7% higher than the comparable quarter in 2017. MPS continues to benefit from our technology leadership and diversified multimarket strategy.

Looking at our revenue by market. Compared with the first quarter of 2017, revenue from consumer markets increased $11.5 million or 32.4%. The year-over-year revenue increase reflected solid improvements in high-value consumer markets, including home appliances, power chargers and lighting as well as increases in certain traditional consumer revenue categories. Consumer revenue of $47.1 million represented 36.5% of our Q1 revenue.

In our computing and storage market, revenue of $31.0 million increased $10.4 million or 50.2% year-over-year, reflecting strong sales growth for cloud computing, SSD storage and high-end notebooks. Computing and storage revenue represented 24.0% of MPS' first quarter 2018 revenue.

First quarter 2018 automotive revenue of $17.7 million grew 43.8% over the same period of 2017. This growth primarily represented increased sales of infotainment, safety and connectivity application products. Automotive revenue represented 13.7% of MPS' first quarter 2018 revenue.

First quarter 2018 industrial revenue of $17.6 million increased 14.3% from the first quarter of 2017, reflecting gains in smart meters, security and power sources. Industrial revenue accounted for 13.6% of our total first quarter revenue.

In Q1, MPS adopted the revenue recognition standard generally referred to as Topic 606. Its adoption had a negligible impact on Q1 revenue.

GAAP gross margin was 55.4%, 40 basis points higher than the fourth quarter of 2017 and 80 basis points higher than the first quarter of 2017. Our GAAP operating income was $22.0 million compared to $13.6 million reported in the first quarter of 2017.

For the first quarter of 2018, non-GAAP gross margin was 55.9%, 20 basis points higher than the fourth quarter 2017 and 40 basis points higher than the first quarter of 2017. Our non-GAAP operating income was $37.2 million compared to $26.5 million reported in the first quarter of 2017.

Let's review our operating expenses. Our GAAP operating expenses were $49.5 million in the first quarter of 2018 compared with $41.3 million in the first quarter of 2017. Our non-GAAP first quarter 2018 operating expenses were $35.0 million, up from the $29.2 million reported in the first quarter of 2017.

The differences between non-GAAP operating expenses and GAAP operating expenses to the quarters discussed here are stock compensation expense and income or loss on an unfunded deferred compensation plan. For the first quarter of 2018, total stock compensation expense, including approximately $433,000 charged to cost of goods sold, was $15.0 million compared with $11.7 million recorded in the first quarter of 2017.

Switching to the bottom line. First quarter 2018 GAAP net income was $21.9 million or $0.49 per fully diluted share compared with $0.33 per share in the first quarter of 2017. First quarter 2018 non-GAAP net income was $35.0 million or $0.79 per fully diluted share compared with $0.58 per share in the first quarter of 2017. Fully diluted shares outstanding at the end of Q1 2018 were 44.3 million.

Now let's look at the balance sheet. Cash, cash equivalents and investments were $312.5 million at the end of the first quarter of 2018 compared to $304.3 million at the end of the fourth quarter 2017. For the quarter, MPS generated operating cash flow of about $16.3 million compared with operating cash flow of $21.9 million in the first quarter of 2017. First quarter 2018 capital spending totaled $7.4 million.

Accounts receivable ended the first quarter of 2018 at $48.2 million or 34 days of sales outstanding, which was 1 day lower than the 35 days posted in the first quarter of 2017. Our internal inventories at the end of the first quarter of 2018 were $111.9 million, up from the $99.3 million at the end of the fourth quarter of 2017. Inventories increased in anticipation of sales growth during the second half of 2018, especially for the computing, consumer and automotive markets. Days of inventory increased to 177 days at the end of Q1 2018 compared with 157 days at the end of the first quarter of 2017.

I would like -- I would now like to turn to our outlook for the second quarter of 2018. We are forecasting Q2 revenue in the range of $135 million to $141 million. We also expect the following: GAAP gross margin in the range of 54.9% to 55.9%; non-GAAP gross margin in the range of 55.4% to 56.4%; total stock-based compensation expense of $15.2 million to $17.2 million, including approximately $500,000 that would be charged to cost of goods sold; litigation expenses ranging between $300,000 to $500,000; GAAP R&D and SG&A expenses between $48.4 million and $53.4 million; non-GAAP R&D and SG&A expenses to be in the range of $33.7 million to $36.7 million. This estimate excludes stock compensation and litigation expenses.

Interest and other income is expected to range from $600,000 to $700,000 before foreign exchange gains or losses, fully diluted shares to be in the range of 43.9 to 44.9 million shares. In conclusion, we continue to grow and continue to enhance shareholder value.

I will now open the phone lines for questions.

(Operator Instructions) And our first next question is from Quinn Bolton from Needham.

Michael and Bernie, I wanted to start with the power management business, specifically for the Purley cycle. Can you give us an update on when the QSMod solutions for CPU power begin to ramp? Does that start this quarter?

I think it's the -- we see it started -- starting the last couple of quarters and just slowly. There are other -- all these activities -- yes, now we see a lot more.

Yes. And I think that, in addition to Purley, we've certainly increased the number of design wins that we have on this cycle with some of our other products, the point-of-load and the E-Fuse. And so as we look ahead, we see it continuing momentum growth.

Do you guys still think you're on track to pick up those 4 to 5 points of share that you'd previously talked about?

Yes. Well, we only talked about results for the next quarter forecast. We don't see anything that's changing that assumption.

Yes. Look, this is very -- at the very beginning -- early for MPS. Other opportunities still developing here.

Okay. And then the second question, just kind of it looks like your inventories are up in anticipation of sort of higher second half sales. But I think the last couple of quarters, you've said that things in the supply chain are tight. You were worried about double ordering. I think that was particularly something that you were worried about heading into the fourth quarter. Can you just give us an update on your backlog coverage? Do you think you've seen -- have you been able to sort of shake out any potential excess from the order books?

Yes, I think that it's prudent to be cautious as far as interpreting the ordering trends that we're seeing. In each of the last 3 quarters, the bookings and backlog going into the quarter have been running higher than they traditionally have. And so as a result of that, we wanted to, a, be able to make sure that we have adequate inventory in order to be able to meet real demand. But by the same token, we're trying to manage what we observe as far as inventory in the channel to make sure that, that doesn't increase and come at the expense of future growth. So when we looked at the channel inventory at the end of Q1, it was very consistent. In fact, it was down a few days from where we had been a year ago.

Our next question is from Rick Schafer from Oppenheimer.

So your auto business -- maybe my first question, your auto business has been doubling annually, I guess, the last few years. I think it was up close to 50%, I think, you highlighted, Bernie, in your remarks this past quarter. Can you talk about the growth expectation for 2018? As much as you -- much color as you can give there. And maybe provide some color on what's driving that growth. I mean, it seems like ADAS is becoming a bigger incremental driver. So as mix kind of maybe favors ADAS going forward, can you talk about what that does to maybe gross margin in that segment?

Sure. When we look at automotive right now, we are certainly benefiting from significant growth. But still, we represent such a small portion of what the total available market is to us. So a lot of what we're seeing right now has been in the gains in infotainment and then we've also seen some gains in body controls and also in certain of the networking applications. And we look forward to opportunities in ADAS in particular. Although I don't think that those will be of a material nature to us until for another couple of years.

Got it. Second question. The 12-volt to 48-volt transition that's sort of already underway in auto, can you talk about that opportunity as it relates to GPU and CPU core power? Is that something else that we should think about as being sort of couple of years from now but before it's really a growth driver? And who do you expect to compete with there? Who do you see also going after the 48-volt market for CPU, GPU?

I think the 48-volt market is inevitable. And as the CPU or GPU power increases, that's the only way to get the current down, to get the efficiency up. Think of the -- it's all well known that our competitors and that they are publishing papers, but we have solutions now.

And Michael, any key competitors you see there? Would it be the sort of the TIs and the Infineons of the world? Or who it be, do you think, at 48-volt?

I don't think -- I don't -- we don't have -- see a real solution out there, okay, other than the existing 48-volts -- in 48-volts, which is very expensive, as far as I know. And I think we are the first few company -- first company that have our own solution as a semiconductor players.

Got it. And then if I could sneak one last question in, just maybe a quick update on your 300-millimeter design efforts? And I don't know how to frame that. I mean, any expectation or what your expectations are for 300-millimeter revenue contribution this year? Or is it more of a -- I know I'm asking a lot of far-out questions. I mean, is it -- or this more of a 2019/2020 kind of thing? And is...

I think it's a 2019/2020 kind of thing. So I don't rule out at the end of the year, we have some small volume productions happening.

And Michael, is that targeting any particular, like, specific verticals? Or is it just kind of across your basket of verticals?

I think it's across our basket of verticals. Now we -- with the 12-inch and we integrate a lot more features in there. And as we talked about, a lot of programming capability, a lot of memories and -- along with the increase of power density. And I think that we'll be putting a power solution on -- as MPS name, so Monolithic Power Systems, we're going to put sub-power systems on a single chip. And 12-inch -- 12-inch widen our capability.

Our next question is from William Stein from SunTrust.

I'd like to sort of contrast the growth rate in light of your inventory build in the quarter. I mean, you've been a rapid growth company for some time. You've accelerated the year-over-year growth in the last couple quarters now, which is great, and inventories are increasing. Should we expect that acceleration to continue and to see even higher year-over-year growth rates as we progress through the year? That's what the inventory build would imply. So if not, I'm hoping maybe we can reconcile it a little bit.

Yes. That's a good reading, okay. I mean, of course, we're not saying -- okay, we're going to be accelerating more. But we certainly anticipated that, okay, if there's opportunity there.

And for investors that sort of look at this outsized growth rate and recognize it's pretty unusual, pretty unique in semis, can you help us maybe review the reasons that you're seeing the design wins maybe from a technology perspective or just from the design wins that you've won recently that you can talk about that would exemplify why you're seeing such rapid growth?

Well, it's a -- if we're talking about all the design wins, okay, we can go for hours. And frankly, I don't even know, I can remember 3 or 4 things, okay. I mean, just -- and this is truly a broad-based growth. And we're not using our standard products and using our configurable software. We can go into many different fields. That's actually realities, yes. And that's the beauty of it. I can't say which one is -- has more growth. And now, you're talking about server, you're talking about autos, and these are much -- very high concentrated market segments that we can talk about. But a lot of others actually grow more than this area. So I can't really talk about it. And we have a -- in fact, a lot of smaller customers using our solution, that really excites me. That means, okay, we're pushing the margin even higher, and we provide the service. Our customers really want that even though we have outrageous margins. So that's kind of the things I'm getting excited.

Our next question is from Ross Seymore from Deutsche Bank.

The comments you said earlier, Bernie, about the inventory up because you saw opportunities in the second half, I think you said in computing, consumer and automotive. Without going into specific customers and sockets, et cetera, can you just talk a little bit about the applications into which you're putting those parts in the back half of the year? And just what sort of dollar content penetration, market penetration, just some numbers around those to give us a little more color to help investors feel comfortable with the inventory level?

Sure. So when we look at a lot of the growth that we've -- we started to enjoy, probably beginning in Q3 of 2017, we were basically introducing new products and new markets for new customers. And the demands of these customers are significant, meaning that we didn't want to come out of the gate with our new release -- new product releases and not be able to sustain the growth because of being constrained in any way. So I think you recall that last year, we invested in bringing up a fourth fab in order to aid capacity. So really, this has been pretty consistent as far as an overarching supply chain management philosophy to position us to be able to achieve, as Michael said, should the demand be there, this accelerated rate of revenue growth. And we believe that we have actually targeted -- so when we look at the inventory levels, they're targeted in some of the highest-growth revenue areas. And right now, it's also, in the quarter, pretty well evenly split between raw materials, work in process and finished goods. Meaning, that what we've done is have a very balanced approach to how we're making those investments.

Yes, Ross, you don't have to worry about these inventories, okay. I mean, we increased it -- and I know our investors -- some of the investors are kind of sensitive, okay, and I'm kind of irritated, okay. And we grow this much and we need real inventory to back it up. And on top of it, all these products are new products. If anything goes wrong, we have something to back it up. And also provides with some industrial, automotive, even computing company. They want inventory. They want -- we're the new players and we guaranteed they're supplied. So that's why we're doing it. And so last reason is I don't worry about inventory, our product cycle lasts for 10 years, and we don't have a problem until have a huge write-off.

That's very helpful. My second question, and I'm going to try to not to irritate you further. If that one happened to, this one might do worse. But the guidance -- on an absolute-dollar basis, the guidance is great. On year-over-year, the guidance is great. Sequentially though, that's less growth than you guys -- I mean, I have to go back many, many, many years. Is there anything that's changing the very near term, the bridge between now and the second half growth that's less than normal? Is there something that's changed just with the move to ASC 606 as far as the seasonality? Just trying to figure out -- or are you just being conservative like you tend to do over time for consistency's benefits? Just trying to figure out what went into the guidance in those regards.

Sure, I can help out with this. So if you look at -- generally speaking, we have a fairly large or pronounced falloff in revenue between Q4 to Q1, and that didn't occur. So the base that we're starting out with in Q1 revenue is much higher than the seasonal norm we'd normally provide for. And some of that represented that we had some late deliveries in Q1 that aided our performance in the quarter but then also creates a issue with the comparable Q2 number. So I would say that we do have a profile to always be able to meet expectations and, in fact, do a little bit better. And there is a change in seasonality relative to what our historic norm has been with Q1, and none of that is related in any way to the 606, the new revenue-recognition standard.

Yes, I think, Ross, you've covered us since the IPO, right. And you see the seasonality change. And we -- from a consumer-centric to broad based now, okay. And last year, we see a 4 quarters consecutive growth. That's the first time -- I think, the first time ever and...

2006.

Well, 2006, that was the last time, so this is the second time. And I think of this time is a really changed -- in a -- from the -- all the business changed. And that's a less irritating question.

Our next question is from Tore Svanberg from Stifel.

First question, could you update us on e-commerce and your programmable products. Or is that business model starting to contribute to revenue yet? Or is that still more of a second half event?

Well, I think our web -- e-commerce website is up, and I think that's only the first step. And regarding to revenue, no, okay. And -- but the business model, and it's more -- the more I visit customers, these are smaller customers, and the more I'm really excited. I think of this as that we were hitting an inflection point in some point -- sometime this year or next year, as we provide a more -- now's the time to provide more content. What can we put on the website, how we serve all these time to -- very quick time-to-market product or underserved customers. And the business models are truly, I really believe, are more and more -- I believe, when I visit those smaller customers, and I see a lot more opportunity. And now we have to deliver more content. We have the website -- but although the programming portion is still not there yet. But as we -- as I talk about it, we hand them a floppy disk, and they can program it on their own now.

That's really helpful. And on that same topic and as that business model starts to materialize, I mean, wouldn't that mean that inventory days will be higher anyway just because these are programmable parts?

I haven't really thought about this what the product will be because we have a third-party product and -- as part of our solutions, okay. And so that probably will be a higher inventory in the future.

And Tore, part of the benefit of being able to go to the 12-inch wafer is that we can have larger production runs and get better cost economics that certainly benefit this mass customization market.

Okay, great. And I had a follow-up question on the 48-volt. So are you using the BCDHV process for that? Or is it something else?

No, that's correct. And we have a very efficient solution. And I think as a lot of people have seen it, and we're presenting a paper that we have a real product now, okay. And these are -- this product family is very cost effective. And I think of the 48-volts, we're really betting on it, that the future.

Okay. Just one last question. I know there's been some talks in the industry about shortages, especially for raw wafers. Is that something that you're seeing? And have you secured enough capacity there for your growth going forward?

We don't have a shortage. And we don't have a shortage, and last year, we expand the fab, and this year, we expand the fab again. And we don't see shortages, okay. We don't. And we have a lot of inventories, and we don't have a shortage issue. And to other ones, I heard a lot of stories, okay, out there. I can't confirm if the -- yes.

Our next question is from Chris Caso from Raymond James.

Just another question, following on to the seasonality question. And is there anything in particular we should be thinking about seasonality with respect to individual segments embedded in the Q2 guidance with automotive and computing carrying much of the sequential growth in Q1? Does that continue into Q2? Or do you see a bit more broad-based revenue growth as you go in Q2?

I can give you something, what I see it, okay, and what I believe. The business that we focus on are very long term and are very broad based. And these are design-in activities and have -- design-in activities turn into revenue takes about 3 or 4 years. And we see all these activities, and we see all these activities turning into revenues. And I think from now on, we will have a very consistent growth, and that's really where we want to see it, in a steady state. And the growth on the -- or maybe steady state have a bad connotation. Some of you are going to pick up, okay, we're slowing down. We're not, okay. And so I think of the consistent is the key. And for my next couple of quarters, and we don't see much of a difference from last year, I guess. Yes.

I mean, one of the things that we work to do is even though we're in high growth relative to our industry, is we want to be predictable. And I don't think there's anything boring about that.

Right. Well, as a follow-on to that, given the -- what appears to be strong industry conditions, strong revenue for you guys, to what extent are you able to be somewhat selective in the business that you take from a quarter-to-quarter basis? I'm sure that there's some margin discrepancies up -- along some of the things that you sell. Given the business conditions right now, are you able to be a little bit more selective in that business? And if so, what does that mean?

One of the things that we benefited from as we've seen this shift in our business mix is that there's longer lead times. And so as a result of that, we're able to have very consistent 10 to 20 basis points improvement in our gross margin quarter-over-quarter, and what that allows us to do is find the mix that allows us to accelerate our rate of revenue growth. So it's really having that visibility in that lead time that allows us to be able to manage the business in this manner.

Great. If I just, one quick follow-on. In computing, Intel made some changes to the road map on 10-nanometer pushing some of that out. I know that you guys have had some design wins on that. Is there any material effect on your business going forward?

No. We're -- we keep an eye on what Intel is doing, but as far as the delay in a release or change in their road map, it does not -- it's not going to impact us.

(Operator Instructions) And our next question is from David Wong from Wells Fargo.

Michael, can you run through some of the R&D projects currently underway that you're most excited about?

Oh, it's e.Motion. And I just visited a couple of customers when I came in, and these really need our help. And they were glad to see us, okay. These are from, what do you call it, the mail -- the packaging sorter to warehouse management to massage chairs to hospital beds, okay. And they have a different kind of design. Each design take them half year -- or 3 months to half year. And we can go in there with our standard products -- standard modules. And sometimes, they want to buy us our -- buy our modules that we buy from a third party. We produce several standard product, and we use a program to change it. This has significantly changed our business. We sell instead of a few dollars a chip, now we sell $20, $30 a module now. And our customers -- or those customers really want this product. And so they do not have to go through the design. So that's kind of thing that get me excited.

I think just to add to that, there's sort of 2 things that all of our R&D is focused on right now is really the ease of use and that we're really focused on selling our customers solutions as opposed to just an individual IC.

Okay, great. And one thing just to confirm, Bernie, I think last earnings call, you talked -- you said that adoption of ASC 606 has negligible revenue recognition impact on Q1 revenues. And that's still true going into the next quarter, is that correct?

That is correct.

We do a sell-to model, right. We never had a sell-through model.

Yes. We only -- our business, we had a very small portion of it that was on sell-through.

Since the beginning of the company, inception of the company, we always do sell-to models.

Correct.

You buy your product, you own it. We don't have a...

Our next question is from William Stein from SunTrust.

It was asked and answered.

Thank you. At this time, I'm showing no further questions. I would like to turn the call back over to Bernie Blegen, Chief Financial Officer, for closing remarks.

I'd like to thank you all for joining us for this conference call. As a reminder, MPS will be hosting an Analyst Day on June 7 at our offices in San Jose, California. We expect this to be an informative update on MPS' strategic direction. I hope you will be able to join us. And if you are unable to join us on June 7, I look forward to talking to you again during our second quarter conference call, which is likely to be at the end of the July. Thank you. Have a nice day.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may now disconnect.