芯源系統 (MPWR) 2018 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Monolithic Power Systems Second Quarter 2018 Earnings Conference Call. (Operator Instructions) As a reminder, today's conference is being recorded.

I'd now like to introduce your host for today's conference, Mr. Bernie Blegen, Chief Financial Officer. Sir, please go ahead.

Thank you very much. Good afternoon, and welcome to the Second 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 the 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, 2018, and Form 10-Q filed on May 8, 2018, which are accessible through our website, www.monolithicpower.com. MPS assumes no obligation to update the information provided on today's call.

We will be discussing gross margin, operating expense, R&D and SG&A expense, operating income, interest and other income, net income and earnings on both a GAAP and a non-GAAP basis. These non-GAAP financial measures are not prepared in accordance with GAAP and should not be considered as a substitute for or superior to measures of financial performance prepared in accordance with GAAP. A table that outlines the reconciliation between the non-GAAP financial measures to GAAP financial measures is included in our earnings release, which we have filed with the SEC. I would refer investors to the Q2 2017, Q1 2018 and Q2 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 earnings release filed with the SEC earlier today.

In the second quarter of 2018, MPS set a new high watermark in quarterly revenue and non-GAAP earnings per share. MPS' Q2 revenue of $139.8 million was 8.2% higher than revenue in the first quarter 2018 and 24.6% higher than the comparable quarter in 2017. MPS' sales momentum continues to build as we generate superior results from our R&D investments, targeting the computing, automotive and industrial markets.

Looking at our revenue by market. In our computing and storage market, revenue of $37.0 million increased $12.5 million or 51.1% year-over-year. Growth in this market was broad-based when compared to the year-ago quarter, with all applications, cloud computing, storage and high-end notebooks increasing at a rate well above the market. Computing and storage revenue represented 26.4% of the MPS' second quarter 2018 revenue.

Second quarter automotive revenue of $20.3 million grew 58.2% over the same period of 2017, fueled by product sales for infotainment, safety and connectivity application products. Automotive revenue was 14.6% of MPS' total second quarter 2018 revenue.

In our consumer markets, revenue of $47.8 million increased 8.9% over the second quarter of 2017 and represented 34.2% of our second quarter 2018 revenue. The year-over-year revenue increase reflected gains in home appliances, IoT-related applications and specialty lighting.

Second quarter 2018 industrial revenue of $19.1 million increased 27.2% from the second quarter 2017, due primarily to increased sales of industrial power supplies. Industrial represented 13.7% of our total second quarter 2018 revenue.

GAAP gross margin was 55.5%, 10 basis points higher than the first quarter of 2018 and 80 basis points higher than the second quarter of 2017. Our GAAP operating income was $24.9 million compared to $22.0 million reported in the first quarter of 2018 and $15.0 million reported in the second quarter of 2017.

Non-GAAP gross margin for the second quarter of 2018 was 56.0%, 10 basis points higher than the first quarter of 2018 and 40 basis points higher than the second quarter from a year ago. Our non-GAAP operating income was $41.4 million compared to $37.2 million reported in the prior quarter and $31.2 million reported in the second quarter of 2017.

Let's review our operating expenses. Our GAAP operating expenses were $52.7 million in the second quarter of 2018 compared with $49.5 million in the second quarter of 2018 and $46.5 million in the second quarter of 2017. Our non-GAAP second quarter 2018 operating expenses were $36.9 million, up from the $35.0 million we spent in the first quarter 2018 and up from the $31.2 million reported in the second quarter 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.

For the second quarter of 2018, total stock compensation expense, including approximately $480,000 charge to cost of goods sold was $15.9 million compared with $15.0 million recorded in the first quarter of 2018.

Switching to the bottom line. Second quarter 2018 GAAP net income was $24.2 million or $0.55 per fully diluted share compared with $21.9 million or $0.49 per share in the first quarter of 2018 and $15.0 million or $0.35 per share in the second quarter of 2017. Q2 non-GAAP net income was $40.0 million or $0.90 per fully diluted share compared with $35.0 million or $0.79 per share in the first quarter of 2018 and $29.5 million or $0.68 per share in the second quarter of 2017.

Fully diluted shares outstanding at the end of Q2 2018 were 44.4 million.

Now let's look at the balance sheet. Cash, cash equivalents and investments were $318.7 million at the end of the second quarter of 2018 compared to $312.5 million at the end of the first quarter of 2018. For the quarter, MPS generated operating cash flow of about $25.4 million compared with Q1 2018 operating cash flow of $16.3 million. Second quarter 2018 capital spending totaled $5.6 million.

Accounts receivable ended the second quarter of 2018 at $53.5 million, representing 35 days of sales outstanding, which was 1 day higher than the 34 days reported both at the end of the first quarter of 2018 and at the end of the second quarter of 2017. Our internal inventories at the end of the second quarter of 2018 were $128.9 million, up from the $111.9 million in the first quarter of 2018. Days of inventory increased to 189 days at the end of Q2 2018 from the 177 days at the end of first quarter of 2018. The increase in inventory days is due to a buildup in advance of seasonally high Q3 revenue; changing customer requirements, particularly in automotive, computing and gaming applications; and hedging for potential upside in the second half of 2018.

I would now like to turn to our outlook for the third quarter of 2018. We are forecasting Q3 revenue in the range of $155.5 million to $161.5 million. We're also expecting -- we also expect the following: GAAP gross margin in the range of 55.2% to 56.2%; non-GAAP gross margin in the range of 55.6% to 56.6%; total stock-based compensation expense of $15 million to $17 million, including approximately $500,000 that will be charged to cost of goods sold; GAAP R&D and SG&A expenses between $52.3 million and $57.3 million; non-GAAP R&D and SG&A expenses to be in the range of $37.8 million to $40.8 million. In anticipation of higher revenue in the next 2 to 3 years, we are stepping up investment in our foundry capabilities. We're actively qualifying 2 12-inch fabs and are in the process of developing advanced technologies.

Other income is expected to be in the range from $600,000 to $1 million before foreign exchange gains and losses, fully diluted shares to be in the range of 44.0 million to 45.0 million shares before share buyback. We are continuing to execute our long-term business strategy, which we believe will maximize long-term shareholder value.

I will now open the phone lines for questions.

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

This is Jeriel Ong on behalf of Ross. Just want to focus in on the auto business a little bit. It's kind of grown from being your smallest business line to now larger than both comms and industrial. At the Analyst Day, you guys detailed that you could see auto growing at 40%, 50% CAGR. Auto grew about 60%, 65% CAGR from 2013 to 2017. Is it fair to think of auto growing like about anywhere from maybe 40% CAGR going forward through 2021? I guess, how do you guys think about the growth going forward?

Sure. At the Analyst Day that was on June 7, we characterized growth in the next 3 years of being in the range between 40% to 50% in any given year. And on a quarterly basis, because there's sort of a step-function with how revenue increases here, that it could be between 30% and 60%. So I think that you're in the right ballpark in -- for your CAGR.

All right. Appreciate that. And next I'd like to ask about the inventory dynamics you guys had this quarter. I understand you guys had some prepared remarks, but I'd love to hear you guys elaborate a little bit more on this. So inventory is up 39% year-on-year. Your -- that's ahead of revenues for actually the sixth straight quarter. Maybe there is mix dynamic there, I understand, with auto. Maybe some of your parts have a longer life cycle and maybe require more of a build. But is there anything else that you'd like to elaborate on why inventories continue to be outgrowing revenues?

Actually, you gave a pretty complete answer for me there, in that we're experiencing...

We already said in earnings, right? One of -- is the way of hedging the potential future growth. And I can give you more color is that we have so many products introduced in the market. They start to ramp. A lot of them, you haven't seen the revenue yet. And during the ramps, you don't want to see any hiccup, either the number of the product or the quality issues. And we don't have any history of it. And that's the way to be very cautious. We use the cash wisely, and we never intend to do -- MPS in the history, we don't write a lot of inventory. And so if you want to talk about our inventories, this is how we manage it. And we have a long life cycles, okay? And as long that we see growth -- grow the top line, grow the EPS, I don't care the rest of it.

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

Congratulations on the nice results for June and particularly strong guide for September. Just wanted to start with the September quarter. Is there anything in particular, any one end market where you're seeing particular strength relating to that guide? Or is it pretty broad-based? And then I've got a couple of follow-ups.

It's pretty much broad-based. I mean, all the growth there that we covered in the last few quarters, the stories remain the same. We are very -- we're at the very beginning, and all the products are ramping across the board.

You guys still feel pretty comfortable with hitting that 8% to 10% share of the server power management market by or for all of 2018?

Yes, our expectations for the server market have really -- have not changed in the 18 months since we started discussing it in those terms. We're seeing very positive results and very good acceptance and continuation of good volume.

Great. And then just wanted to ask, some others in the industry have been constrained by the supply of ceramic capacitors and passive devices. And just wondering if you're seeing those same constraints? If so, are you doing anything to try to avoid some of those constraints, possibly purchasing passive devices that you can sell as part of your solution to the customers. Or any thoughts on the supply of passives and whether it's impacting your business?

Yes, it does impact our business. And a lot of product ramping are not as high as we expected it. And we are looking heavily to design around without using the capacitors.

Okay. And then lastly, for you, Bernie, you mentioned the step-up in spending here to qualify 2 12-inch foundries, something like that, that might be a 2- to 3-year phenomena. Is that -- does that take you above the OpEx as a percent of sales in that range of 50% to 60%? Or do you still think you can kind of target that 50% to 60% OpEx growth as a percent of revenue growth?

Yes, I think for a brief period of time here, and I don't know how many quarters necessarily that's going to be. But while we're ramping and qualifying the 2 fabs, we will be beyond what our model is. But we're very conscious of the need to get operating leverage, in return spending down to the 50% to 60% of revenue growth. But I would say that probably for the next 4 to 5 quarters, maybe about 6, we'll probably be above that level.

The next question comes from the line of Rick Schafer with Oppenheimer.

I guess, maybe I'll start off with the e-commerce question. Maybe an update on the progress there with that effort? I know you're already adding some customers. So I'm just curious what feedback has been? And maybe if you could quantify what that opportunity looks like for you guys over the next couple of years? Put some kind of a -- I know that's tough. But put some kind of -- quantify it somehow, I guess, give us a TAM kind of what you -- how you guys look at that.

Well, I can answer you. The first question first. The website is up, and it still looks pretty shitty, but we will improve it later. Okay? And we do have orders come from the -- our own website. And the programmable modules that we're pushing out there and this -- that -- trajectories -- okay, we can be -- we cannot even predict. And because this is almost nothing to something. And we look at the numbers, and in the last couple of months, is better than I expected. And so we keep evaluating. So stay tuned.

Okay but for now, I assume, you're -- we're keeping it out of the model for now, I guess.

Yes, we keep out of that model.

We kept revenue expectations -- we made a conscious effort to keep them low for '18 and '19. And really what we're trying to do is get up to speed on what it takes to market and successfully manage the e-commerce experience. And during this time, we'll also be adding more products and getting traction with the customer acceptance.

Got it. Then maybe switch gears to 48-volt core power. I know in the next couple of years, you guys have talked about 48-volt coming to GPU and CPU. I guess, maybe if you could walk us through what the timing looks like of that. Who are you likely to compete with there? I think GPU probably ramps before CPU. So maybe what has to happen for that to go?

Yes. We expect it hitting the mainstream in the early or mid-2019. And we have been looking at -- we have been developing product for -- in the last 3 years. And we see this as imminent solutions for the future servers. And I can't answer who do we compete with, because there's no such solution out there. And maybe there's a few. And our solution will be mass produced and easy to use. And we see -- in the last few years, we see -- we have many design wins.

And just to add real quickly, as Michael said that we've had this project under development for 3 years. And I think that there are a couple of data points in the market today that validate the timing of having our solution released in the 2019 was a good set of circumstances for us. We're in the right place at the right time with the 48-volt solution.

Got it. And then just a quick clarification question, if I could, on 300 millimeter. Where do you guys stand today? I mean, do you have any design wins on 300 millimeter? Or is that still on the comm? And then maybe if you could update us on the ramp of any design wins at 55 or 65 nanometer?

These are some of the stuff that we're hitting in the market very, very soon, somewhere the -- and I don't know it is the first shipment or we certainly will start to sampling it.

Slightly different development tracks where the 55 effort will probably have design wins early in 2019 and the 300 millimeter will probably be more out in the 2020.

Your next question comes from William Stein with SunTrust.

I wanted to return to the comment about hedging for potential upside in the second half. Is there a particular end market that, that's weighted towards? And likewise, would you anticipate sort of the variability and potential upside to be more of a Q3 event? Or is there something special in Q4 that we should think about? And then I have a follow-up, if I can.

Yes, I think that as we've said on the call that there is really a 3 or 4 key areas that are driving a lot of our business. And within that, what we've tried to do is we're working within a range of expectations for any one of those. And generally, what we've done is we've modeled in our revenue expectations the midpoint or below, but we've provided the inventory at the upper end of the range that has been provided to us by the OEM or from the end customer. So it really could be any one of the opportunities in computing and storage or automotive in particular where we could experience a pop.

I appreciate that. And maybe backing up, you offered initial take on e-commerce. I wonder if there is any change in the customer traction relative to the e.Motion product?

It's a -- E.Motion product, then a lot of them I see we're rather selling the ICs and we're selling the total solution. And it's a lot better way, a lot easier way in -- to generating revenues or to service our customers that we learned from -- I learned it from the last couple of years. And so I see this is the same kind of (inaudible) to the same kind of things.

And on the e.Motion, that is starting to ramp very nicely right now. And we've seen a lot of design wins that we have not just in '18 and '19, but even '20 and '21 that we're already going to be benefiting from. So that is an initiative that we started in earnest about 4 years ago. And that's how long it takes for these things to ramp. Whereas the e-commerce platform and the field programmability offered on it, we're just in the very early stages of that.

Your next question comes from Tore Svanberg with Stifel.

First question. The 12-inch fabs, I understand the OpEx on top of it. But how should I think about that impacting your gross margins over time, because I would think that, that could potentially be pretty accretive to your gross margin?

Yes, Tore, okay, you've covered us for long times. And you know that. Our pattern is that we move from early days to go to 6-inch and then we go to 8-inch. 8-inch, with the first 8-inch was a 0.35-micron fab. And we -- until these 180 nanometers fabs depreciated further, then we move there, okay? So each step we move to a new foundry or new more advanced fab that it doesn't impact the model immediately. And so those 12-inch fabs are still expensive. But 3, 4 years later, they will be cheaper. And so we just follow our history. We repeat and repeat the same thing, and by the time, we have a superior technologies and good cost.

Very good. And I believe last quarter, your ASPs were up sort of in the high single digits. Is there a number you could share with us for this quarter?

Not at this point. What I can tell you is that the ASP delta, it has a lot to do with our mix of business. And many of these new opportunities that we're going into have ASPs that are 2, 3 and 4x what some of our legacy products, particularly in consumer, used to be. So I think that you're going to see an upward bias as the higher percent of our business is with these newer opportunities.

Very good. And just last question on automotive, it sounds like there could be some pretty major upside there next -- in the second half of the year. If we think about the constant you have in the car so far, I think it's been primarily in lighting and also in some of the USB power, stuff like that. Is there some new incremental constant in other areas that could come already in the second half of this year?

Actually, as far as the technology that we've introduced into automotive, it really is centered around the infotainment, the USB-C ports and body controls. Interesting, the lighting, we're just at the very early stages of that. And so over the course of the next 12 months, I think you're going to see it ramping in the body controls and then little bit after that in lighting.

Our next question comes from the line of Alex Vecchi with William Blair.

I guess, just moving back to the increased expenses on the fabs, Bernie, you said that would go on for 4 to 6 quarters. And you guys just gave a 2021 sort of operating margin target at your Analyst Day. I assume you're still -- those targets are still intact and these increased expenses were obviously planned at that point?

Yes. What we have been looking to do and we've been sort of trying to provide some soft guidance on both the timing and order of magnitude. And now we're starting to see the -- those investments translate into the P&L here. But the overall commitment to manage our core business outside of -- I'm not going to describe these as onetime costs necessarily, but this is project-related and those will wind down. And that will allow us to get to the targets that we've set for ourselves.

Well, here we see the opportunity to grow and we want to -- we will grow in the next 2, 3 years and that we have lot of opportunities. And so we made a decision so we're going to increase it and to increase on the expenditures, the investments rather in a new fab so that we don't have -- we won't have capacity issues, at the same times, keep our technology advance forward. And just look at us, last year -- early this year, MPS did not have capacity constraint. We grow as normal. So we spend our money wisely. And as long as we grow -- again, I only care of the top line and EPS. I care the rest of it less.

And then as far as characterizing what we provided at the Analyst Day, those are guidelines. So for example, in the revenue, we want to be able to grow at 20%. And in this case, with the midpoint of the guidance that we've offered for Q3 as well as what we've done in Q1 and Q2, we're several percentage points above that this year. So you really have to look at the guidelines that we've offered in the business model. Sometimes we'll be above it. Sometimes we'll be below it. And the thing to focus on is we only provide guidance one quarter ahead at a time.

Well, to be fair, okay, we grow less, okay, we'll spend less. And now -- and we're accelerating our growth. We cannot grow on the -- in the thin air.

Understood. Are you guys seeing sort of the seasonality of your business change as you become more broad-based? I mean, obviously, your Q3 sort of in line with the normal seasonal. I know you don't guide Q4. But given some of the upside opportunities you guys have been describing, how should we sort of think about seasonality as we look out into the out year as well?

Yes, I'd say that by and large, we are looking to maintain seasonality the way we've been historically. Now having said that, Q1 came in higher. There is a lower step-down from Q4 to Q1 than we had experienced. And as a result of that, the increase from Q2-- from Q1 was also lower than we've historically done by about 3 percentage points. But then in the guide that we've given here for Q3, that's almost right down in the middle of how we performed in the past.

Yes, our seasonality is changed. In the last year -- as business changed. And also, we are in a higher growth period. And so the last year, we have a 4 consecutive -- I think -- is it right?

Yes.

Four consecutive growth, okay, never happened since 2004, 2005. Okay? And so I can't tell you what's our seasonality anymore.

(Operator Instructions) Our next question comes from the line of Matt Ramsay with Cowen.

This is Josh Buchalter on behalf of Matt. First, I'd just like to dig a little bit more on the storage and compute bucket. Is there any more granularity you could provide on some of the moving parts within the quarter and maybe the guide, given your large socket wins there?

It's -- again, it's a story of -- we have too many riches because all of the major product lines that we've gone after in the computing and the storage are doing very, very well. And in the guide for Q3, that just reflects the continuation. And so it's a situation where a lot of the technologies that we invested in developing are now coming into the market. So if you focus on the servers, for example, that transition has rolled out almost identical to how we expected it. And right now, we don't see any headwinds. In fact, it's continuation of tailwinds.

Understood. And then you provide an update on e.Motion and e-commerce. I was hoping maybe you could provide the same on field programmability?

No. These are tied together. E-commerce, of course, is wider than we do. Some of the product is not programmable. And currently, I think that we sell most of our product, it's kind of fixed -- and because the website was late. And now we have the capability to reprogram the product, reconfigure the product. So these are the same to me, e-commerce and field programmable.

And I think that as we look at the continuing demands in this area is that we're going to take even larger number of our product catalog today and reengineer it around field programmability, which offers the -- our customers the best ease of use and time to market.

I'm showing no further questions in queue at this time. I'd like to turn the call back to management for closing remarks.

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

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program, and you may now disconnect. Everyone, have a great day.