Power Integrations Inc (POWI) 2015 Q4 法說會逐字稿

Good afternoon, I would like to welcome everyone to the Power Integrations fourth quarter earnings call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks there will be a question-and-answer session. (Operator Instructions). Thank you. Joe Shiffler, you may now begin your conference.

Thank you Heather. Good afternoon. Thanks for joining us to discuss Power Integrations financial results for the fourth quarter of 2015. With me on the call are Balu Balakrishnan, President and CEO of Power Integrations, and Sandeep Nayyar, our Chief Financial Officer. During today's call, we will refer to financial measures not calculated according to Generally Accepted Accounting Principles. Please refer to today's press release available on our website at Investors. Power.com for an explanation of our reasons for using such non-GAAP measures, as well as tables reconciling these measures to our GAAP results.

Our discussion today including the Q&A session will include forward-looking statements, reflecting our forecasts to certain aspects of the Company's future business and financial results. Such statements are denoted by words like will, would, believe, should, expect, outlook, estimate, plan, goal, anticipate, forecast, and similar expressions that look toward future events or performance. Forward-looking statements are based on current information that is dynamic and subject to abrupt changes. Our forward-looking statements are subject to risks and uncertainties which may cause actual results to differ materially from those projected or implied in our statements. Such risks and uncertainties are discussed in today's press release and in our most recent Form 10-Q filed with the SEC on October 30, 2015. This conference call is the property of Power Integrations, and any recording or rebroadcast is expressly prohibited without the written consent of Power Integrations. Now I will turn the call over to Balu.

Thanks Joe. Good afternoon. Fourth quarter revenues were $87.3 million, down 2% from the prior quarter. That's within our forecasted range, but below the midpoint due to softness in China consumer appliance market, most notably in air conditioning applications. Overall revenues from the consumer market, our largest category, were down mid-single digits sequentially. The other end markets were generally consistent with our expectations. Seasonal softness at a major cell phone end customer drove a slight sequential decline in communications revenues, while revenues from computing applications were down mid-single digits. Industrial revenues grew mid-single digits sequentially on strength in high power and LED lighting.

Earnings for the fourth quarter were $0.58 per share on a non-GAAP basis, including a $0.05 benefit from the R&D tax credit. Cash flow was strong with nearly $25 million in cash generated from operations bringing the full year total to $92 million, up almost 10% from the prior year. In light of the continued strength of our cash flow and our balance sheet, our Board of Directors has increased our quarterly dividend to $0.13 per share, effective with the March 31st payout.

For the full year, revenues fell by 1%, with the primary headwind being a 30% reduction in sales into computing market, where demand from power supply vendors was weaker than the end market itself. High power revenues were also lower on the year, reflecting softness in energy markets, as well as the effects of foreign currency on our European sales.

While not satisfied with our 2015 top line performance, we believe we are exiting the year on an improving trajectory. Fourth quarter revenues grew 1% on a year-over-year basis, which compares favorably to a 4% decrease for the analog semiconductor market. Likewise our first quarter outlook calls for 2% year-over-year growth at the midpoint, in contrast to the declines projected by many of our industry peers.

Perhaps a more notable indicator is our recent success in the communications market, where revenues grew more than 20% for both the fourth quarter and the full year. We believe this is important for two reasons. One, we expect the growth in communications to continue in 2016, and two, it represents the leading edge of a product cycle that is now beginning to take hold across all of our end markets. I will briefly expand on each of these points.

First, we believe the growth in communications is more than a one-year story. Rapid charging emerged as a disruptive force in the mobile phone market last year, creating a need for high value integrated solutions in a market where commodity discrete solutions had become predominant. Our InnoSwitch products fulfill the needs of this market beautifully and we are winning a sizable share. InnoSwitch is now in production at most top tier smartphone OEMs, and we have added several designs in Q4 at both new and existing end customers. We believe rapid charging will be a growth driver for years to come, with power levels continuing to rise, charging speeds becoming an important differentiator in the mobile device market, and new technologies such as USB-PD and Type C connectors just beginning to emerge.

The InnoSwitch technology will enable us to maintain a leading position in this market, and we continue to develop our product portfolio with that goal in mind. Last month we introduced InnoSwitch-CP for "constant power," which is designed to optimize the charging performance of variable voltage protocols like USB-PD or Qualcomm Quick Charge. InnoSwitch CP works in tandem with our CHY103 interface chip to implement Quick Charge 3.0, Qualcomm's latest generation rapid charging protocol. This chipset is now shipping to a top tier Chinese handset OEM, and we expect more such designs to follow over the course of this year.

In the mobile device market InnoSwitch is winning because it helps designers with tradeoffs that arise when trying to squeeze two, three, or even four times as much power out of a charger, while maintaining the small form factors that we have all come to expect.

But InnoSwitch technology is applicable well beyond mobile phone chargers, and is just now beginning to penetrate other end markets. We now have InnoSwitch designs in progress in more than 30 different applications, including appliances, consumer electronics, and industrial applications, where the reliability and the efficiency benefits of the technology are valued far more than in charger applications. Moreover we believe InnoSwitch is a foundational technology that will spawn multiple generations, and even new categories of products. Later this year we expect to roll out our next generation InnoSwitch, which will enhance the already high efficiency of InnoSwitch, while enabling us to address higher power applications, resulting in a significant expansion of the addressable market. This next generation InnoSwitch will utilize our new high density process technology, making the product more cost effective than the current generation.

We also have in our pipeline products that will bring InnoSwitch technology to other end markets, such as lighting and even high power, where we believe we can roughly double the size of the market opportunity, by addressing a wider range of IGBT-driver applications.

In summary, while our recent results have not lived up to our history of outperforming the market, we believe we are turning a corner. We expect growth this year from markets like high power and LED lighting, both of which declined in 2015. We expect continued growth in rapid charging applications, and the beginning of InnoSwitch ramp in other end markets. Most importantly, we expect to introduce a larger than usual number of new products over the next two years, as the technologies underlying InnoSwitch drive a mega product cycle that we believe will drive our growth for many years to come.

Before I turn it over to Sandeep, I will quickly touch on the near term outlook and also the latest developments in our litigation with Fairchild. As indicated in our press release, we are forecasting first quarter revenues of $84 million, plus or minus $3 million, which would be a 4% sequential decline at the midpoint. Approximately 80% of our revenues come from Asian markets, and the lunar new year holidays have become an increasingly important seasonal factor in our business, effectively making Q1 a 12-week quarter.

Notwithstanding the seasonal patterns, we are encouraged by the recent booking trends which are tracking well above this time a year ago. We have several high volume design wins scheduled to ramp in the June quarter, and we are seeing customers and distributors put substantial backlog in place prior to the holiday break. We expect shipments to exceed revenues meaningfully in Q1, as distributors take on inventory to support what we think will be strong sequential growth in the June quarter.

Finally I would like to highlight yet another favorable result in our Fairchild patent litigation which we announced in mid-December. You may recall that in 2014 a jury in California found that Fairchild infringed two of our patents, and awarded us $105 million in damages. Fairchild contested the award, based on changes in case law that occurred after the initial verdict, and was granted a new trial to determine a revised damage award. The award resulting from the new trial was $140 million, one-third larger than the original amount. While the outcome of the case is subject to further challenges, the size of the award leaves little doubt about the magnitude of Fairchild's infringement, and the impact it has had on our business in recent years. We are hopeful that this verdict marks a turning point, and that Fairchild's infringement will finally stop. With that, I will turn it over to Sandeep for a review of the financials.

Thanks Balu. Good afternoon. I will briefly cover the Q4 financials, and the Q1 outlook, and then we will take questions. My remarks will focus mainly on the non-GAAP numbers, which are reconciled to the corresponding GAAP figures in the tables accompanying our press release. Q4 revenues were $87.3 million, down 2% from the prior quarter, but up 1% year-over-year, driven by growth in the communications end market. While modest, this return to year-over-year growth does compare favorably to the broader peer group. Revenue mix for the quarter was 34% consumer, 33% industrial, and 26% communication, and 7% computer. As Balu stated in his remarks, the appliance market was a soft spot in Q4. As appliances are a relatively high margin end market for us, the end market mix was slightly unfavorable versus our expectations, resulting in a 0.5 point decline in non-GAAP gross margins for the quarter, coming in at 50.5%.

As indicated in the press release we expect gross margin to rebound in the March quarter to about 51%, reflecting a slightly more favorable end market mix. Fourth quarter operating expenses decreased by $0.5 million compared to the third quarter, coming in well below our projections. This was largely a function of timing and some expenses that were expected to occur in Q4 were pushed out to Q1. Notably non-GAAP expenses for the full year were essentially flat, as we made every effort to keep spending aligned with revenue in a challenging demand environment. Our tax provision for the fourth quarter reflects the full year impact of the Federal R&D credit which was enacted in December. This resulted in a negative effective tax rate for the quarter adding $0.05 per share to our non-GAAP earnings.

Including the tax benefit, fourth quarter non-GAAP earnings were $0.58 per diluted share. Diluted share count for the quarter was 29.1 million shares, down slightly from the prior quarter, as the prior quarter's buyback activity was fully reflected in the weighted average calculation. No shares were repurchased in the fourth quarter as our share price exceeded the maximum purchase price specified in our buyback plan. However over the course of the year, we repurchased 1.25 million shares for $53.7 million, resulting in a 4% reduction in weighted average share count for the full year. Cash flow from operations for the year was $92 million, with capital expenditures totaling $22 million. We returned virtually all of our free cash flow to investors during the year, using a total of $68 million for buyback and dividends.

As a result, our balance of cash and investments were virtually unchanged from the end of the prior year at $174 million. Inventory on our balance sheet decreased further during the quarter to 107 days on hand, down 6 days from the prior quarter, and remaining well within our targeted range. Looking ahead to the first quarter, we anticipate a sequential decline in revenues reflecting the effect of the lunar new year holiday, as Balu noted. Specifically we are projecting a revenue range of $84 million plus or minus $3 million. This would be a 2% increase year-over-year at the midpoint of the range.

While not prepared to give a forecast for the second quarter, we do think an acceleration of our growth rate is likely in Q2 based on the current booking trends, and the expected contributions of new design wins. As mentioned earlier we expect gross margin to tick higher in the first quarter to approximately 51% on a non-GAAP basis. We expect non-GAAP gross margin to hover around the same level for the balance of the year, as the cost reductions roughly offset the impact of further growth from InnoSwitch.

Non-GAAP operating expenses will be sequentially higher, reflecting the pushout of expenses from Q4, as well as the seasonal effects of payroll taxes, and the December shutdown. Specifically we expect non-GAAP expenses for the December quarter to be between $30 million and $31 million. I expect the non-GAAP tax rate for the first quarter and the year to be in the range of 4% to 5%, reflecting the benefit of the R&D tax credit which was made permanent in the December legislation. With that, I will turn it back over to Joe.

Thanks Sandeep. We will open it up now for Q&A. Heather, will you please repeat the instructions for asking questions?

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

Hi, this is Evan Wang calling for Tore. We are really glad to hear that you think that the June quarter growth can accelerate, but can you also tell us a little bit about what gives you that confidence? Are you having better visibility or just stronger bookings? If so has that been ramping steadily?

We have a number of design wins that will be ramping in Q2. Specifically in cell phones for rapid charging, but also in industrial applications, high power and a number of other areas. And also it is supported by the bookings we have in January, which has been very strong. Significantly stronger than the January of last year, and our discussions with the distributors indicate that they are building inventory in preparation for Q2.

That is great. I know you probably can't see that far, but how does the second half look for you, given you believe the June quarter to be strong?

To the best we can, and assuming the macro remains reasonable, we think Q3 will also be a growth quarter, a strong growth quarter for us. And Q4 is usually flat, approximately flat to slightly down.

I have a follow-up question on your rapid charge. I believe that the bulk of your revenue has been coming 15 watts, of course 20 watts or higher would be even closer to your sweet spot. When do you expect that to gain momentum?

Well, already we are seeing all of the major OEMs, or most of the major OEMs offering rapid charge. And the power level varies from 10 watts, actually 7.5 watts all of the way up to 20 or 22 watts or so. And I think for the cell phone, that's probably where it is going to end up, roughly around 20 watts. There may be some customers that will go to 25 or 30 watts, but if you go to tablets and so on, you will need higher power.

Great, thank you.

You're welcome.

Your next question comes from the line of Steve Smigie with Raymond James. Your line is open.

Great, thanks a lot, guys. I just wanted to follow-up on a few things. First on InnoSwitch, you talked about a whole bunch of activity there. Can you talk about, are there any sort of revenue design wins yet, and if not, when could we potentially see that?

Well, we had significant revenue on InnoSwitch in 2015. If you remember in 2014, we had about $5 million worth of revenue, and we were expecting it to quadruple, and it actually did quadruple in 2015, and we expect that to continue to grow and add maybe somewhere between $10 million to $15 million additional sales dollars this year. And 2017 could be even stronger, because we will be introducing our next generation InnoSwitch, which will address higher power levels, and expand the adjustable market significantly.

To clarify I meant non handset wins?

Oh non handset. So non handset we have about 30 different applications where there is a significant design activity going on right now, of the ones that are significant that were announced already are in the appliance business. We have one major design win at a large appliance customer in Europe, that will go into production in the second half. It has been designed into a platform, but the first design is going to be a washer. It is not significant in dollar terms, but it is the beginning of the use of InnoSwitch by this customer, and we expect that most of the new products will use InnoSwitch. There is another appliance customer who is very close to qualifying our product, but beyond that as I said, there are about 30 different applications where people are designing in InnoSwitch as we speak.

Great. Thanks. Then turning to appliances in general, a little bit weak this quarter as you mentioned around China. How much of that is an inventory thing versus we have obviously seen a lot of reports about China weakness. Just trying to understand can the weakness continue over the next quarter or two?

Well, it is fundamentally a demand issue which has become an inventory problem last year. To the extent that we can find out, it is related to the Chinese economy in general, but specifically the housing market in China which is very, very weak. There was an inventory build up at appliance customers that we think will be pretty much worked out by Q1 or this quarter. So we expect the appliance market to come back up in the second quarter.

Great. And just two more quick ones, on LED lighting, can you give us some update there in terms of where you're seeing growth, magnitude of growth at this point? And on the fast charge, what level of penetration do you think fast charge is in the market, 5%, 10% of phones will switch over to fast charge, something like that?

That's a good question. Let me answer the second question first, the fast charge. I think we are in a very strong position in fast charge. There is only one other competitor who is in a similar strong position, and that's primarily because of one specific design win at a large OEM, who uses a unique protocol that we intentionally decided not to support, because it is very customer specific. We also believe most of the OEMs will move to USB-PD in the long-term. So in terms of the number of design wins, the breadth of customers, we clearly lead in the rapid charging market.

As far as what percentage of the phones is rapid charging, it is really hard to tell because it is very dynamic. As we speak people are moving to rapid charging. It is changing very quickly. But it is clear that rapid charging is going to be the trend moving forward. My expectation is over time most of the smartphones will convert to rapid charging. And to answer the second question, which was your first question I guess, the LED market. As you know our LED revenue declined last year by double digits. Primarily because of us deciding to walk away from the low end bulb market, which had become very commoditized, and we didn't want to go after the market and hurt our margins when the market, this low end market doesn't care about any of the values we bring, such as integration efficiency, power factor, and so on and so forth.

So we decided to focus on the higher end bulbs for the western consumption, that is the US and Europe, and also the commercial and industrial lighting. I think again there we have finally turned the corner on that. The revenue from LED in Q4 was sequentially slightly higher than in Q3. And going forward we expect to be able to grow that with the new products we will be introducing. We just introduced LYTSwitch-5. We have other products that will be introduced very shortly, which will address the higher end of that market.

In addition to that, what we are finding is the higher end which used to be very crowded, because most of the analog semiconductor companies had decided to get into that market. Now we are finding that the lot of them are de-emphasizing that market. I think we talked about this earlier, most of those new companies did not have a lot of experience in the AC/DC power supplies. As long as the cost of power supply was a small part of the LED market, nobody really cared about the cost of the driver. But now that the LEDs have become very inexpensive, the driver becomes a significant part of the LED cost, and I think we are in a better position on the higher end of that market now, and so we expect the LED revenue to grow this year.

Great. Thank you very much. I appreciate it.

You're welcome.

Your next question comes from the line of Ross Seymour with Deutsche Bank. Your line is open.

Just wanted to start off with a higher level question. Historically POWI has outgrown the market. So whatever the analog market grew you guys outgrew it. You guys talked a bit about incrementally but nonetheless you slightly outgrew the market in 2015. When you look back in 2015 and probably more importantly into 2016, the delta by which you outgrew the market has shrunk in the last couple of years. Do you think it can get back to meaningful out performance, and if so how?

Excellent question. Certainly we are not pleased with the 2015 performance, and the main reason we could not outgrow the market is to do with the PC market, where our revenue went down by 30%. Even though our other markets, especially the communications markets grew dramatically. It barely compensated for the decline in the PC market. If you look at 2014, we were specifically hurt by two largest customers in the communications market, which caused us the decline in driven units in the communications market in 2014. The good news is we have gone past that. First of all we grew very nicely in communications market in 2015. We expect that to continue to grow not only in 2016, and for several years to come.

Also the other thing that hurt us in 2015, was the high-power market which was down because of China, because of the exchange rate, because of the oil prices being low. Again we have reached a steady state there, and we expect the high power to also come back from Q2 onwards. Our plan is to get back to the outperformance we have been delivering in the past. And we expect to do that starting this year, and even more next year with the new products we will be introducing. We have a broad range of products that will dramatically expand our SAM, from where we are now, 2.5 billion to 3 billion, actually 2.5 billion going to 3 billion this year, and going to as much as 3.5 billion to 4 billion next year. So our goal is to get back to the kind of outperformance as we have delivered in the past.

I guess one follow-up on that Balu is the computing side, I get what happened on the communication side, and I think everybody knows computing was weaker than expected for the year, but it was surely not down 30%. I know you mentioned earlier that you guys were down worse than the market as a whole, but any explanation for that? Is there an inventory adjustment that we should expect that to snap back to, or that 7% of sales where you not have been computing, is that the new steady state for some reason?

That's a good question. We have talked about it ourselves about it, but the only explanation that we have from our customers is that they had a much larger inventory of the power supplies. If you look at the way the computer companies work, they have power supplies already stocked at their manufacturing sites, which are replenished on a continuous basis. So when the market goes down you have a much bigger inventory problem on power supplies, than you have on the motherboards and the microprocessors, which are much more expensive components, as you can imagine. I think that is the fundamental problem is that we had a much bigger inventory correction than other PC semiconductor manufacturers have had. And the other thing that also hurt us, is that once the PC market started going down so dramatically, most of our customers stopped designing new power supplies, which would have helped us because of our Hiper products. We were making good inroads into the main power supply, but what we found out is that nobody wants to design a new power supply when the market is tanking. So that also is kind of an unfortunate situation.

I guess my last one for Sandeep, you talked about a bunch of new products launching this year and that will be good news for revenue. You gave the gross margin at about that 51% level roughly, and staying there for the year, what are the OpEx implications when have you this number of new products being introduced?

So that's the reason we kind of guided that we are going to grow the OpEx to mid-single digits this year because of the challenging demand environment we kind of tightened our belt. Because you have had a lot of, as Balu indicated, a lot of technological breakthroughs, we are going to make significant investments in R&D, that is why our OpEx will be mid-single digits, but I think this spend in R&D will not only help us with new products coming out this year, but set the stage very well for 2017. And that's why as we indicated in total that we have an unusually large number of products that are coming out in 2016 and 2017.

Great, one last quick clarification and I promise I will go away. Do you say up mid-single digits, do you mean dollars or percent?

Percent.

Great, thanks guys.

Your next question comes from the line of Christopher Longiaru with Sidoti & Company. Your line is open.

Thanks for taking my question. In terms of OpEx I believe that you said you had some costs from December pushed out. Usually you have some higher tape out costs in that quarter. Can you give us an idea how we can think about your operating expenses on a normalized basis going forward?

As we indicated in the December quarter what happens is not only do we have the shutdown, but as we have tightened our belt a little bit, certain expenses whether it was for what we talked about the R&D materials, but also some head count got pushed out. What happens in Q1 is the FICA kicks in. In Q1 you have roughly about a $1 million impact, just between the shutdown and the FICA kicking in. Again the other expenses that got shifted out, that's why we are giving guidance of $30 million to $31 million. It will taper up a little bit in Q2 from there, and then come down in Q3 and Q4 as FICA tapers off. And then basically for the year we will have a mid single digit percentage increase from the totals we were at the end of FY15. Our non-GAAP FY15 numbers are roughly around $117 million non-GAAP. So we will go up mid single digit percentages from there.

Got it. All right, and then you talked about 30 different applications in different stages. Can you give us a little more granularity? I know you mentioned some washers and some beginning new products, but all different means of end markets have different time frames. From modeling, we are trying to move on this, can you give us a little more granularity into what those 30-plus applications look like, in as much color as you can give?

Absolutely. I can just run through them if you like. The important thing is the contribution from those markets will be gradual, meaning we will have some contributions this year, but it won't be very significant. It will be really consistent over the next two or three years. It will ramp up very nicely. Other than cell phone chargers, which is a big one, the second biggest one is major appliances, and then residential networking, set top boxes, metering, merchant adapters, consumer, other consumer products, computers, server standby, comfort appliances, the air conditioning units, power tools, industrial battery chargers, monitors, industrial control. I can go on and on and on. The important thing is, it covers all of the four major markets.

Let me ask it kind of a different way. You said steady, gradual growth. You care to take a guess at kind of what the three-year growth rate is on that business?

The best we can tell you is the InnoSwitch revenue in 2016, we expect to be $10 million to $15 million higher than last year. A lot of that is from cell phones, but there is a portion of that from a non cell phone applications. Next year 2017 we think the dollar increase could be even higher, because of these other applications coming into the revenue picture.

Great, that's all I have, guys. Thank you.

You're welcome.

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

Yes, this is Evan again with a couple of follow-up questions. About your guidance, your revenue guidance has a wider range than usual. Is this typical for a March quarter? And can you talk about what the moving parts are that would get you to move within that range?

Evan, typically the guide is within plus or minus $3 million, so this is pretty typical what we do. The range that you always get, this is the lunar new year as you look traditionally in the last three years, has caused us some difficulty and to be much more precise. If you look at the last couple of years, our shipments as we indicated have been higher than the revenue sold through. We are on sell through accounting. And it is because of the holidays, and typically while we are seeing such large bookings, is because people are prepping for a nice ramp up in Q2.

I see. And about your inventory levels, I see that your internal inventory is down quite a bit, but what about the channel inventory? Can you give us a sense of where you are in the channel?

We are at about 6.5 weeks in Q4 which is kind of similar to what we had in Q3. Based on the bookings and expecting that the shipments will be much higher than revenues so we expect the channel inventory to grow in the first quarter.

Okay. The channel inventory in the PC segment, has that been normalized or is that still somewhat elevated?

I think we have kind of, if you are looking at it, I think it is kind of normalized, but as we are looking ahead in our models, we are not looking for a huge growth in the computer segment. We are expecting it to be kind of flattish. But we are expecting all of our other three end markets to grow very nicely this year.

Great. And my last question here is about your gross margin in calendar 2016. I think that you had kind of commented before that it would fall in the range of 51% to 52%. Given your view on the momentum that your new products are getting, and I know in the past you have talked about there being some start up costs or inefficiencies that could cause your new product gross margin to be slightly lower than they would be otherwise, is there any impact, any visible impact or changes in your [load] that you can talk about?

That is the reason we have given the 51 plus or minus guidance. We were thinking that we would also have a little more benefit from yen. With the yen changing we are not going to get all of that benefit this year that we were originally talking about. That has impacted it a little bit. It is a mix, so it is a combination of all of this, but we feel that we will be in this range of 51 plus or minus. It could be a little up. It could be a little off plus or minus, very close to that throughout the year. Basically it is we have a lot of cost reductions coming in, which will offset the impact of the growth in InnoSwitch, which is a headwind a little bit, in terms of margin.

Great. Well thank you for that clarification.

There are no further questions at this time. I will turn the call back to Mr. Shiffler for closing remarks.

Thank you. Thanks everyone for listening. There will be a replay of this call available on our website, Investors. Power.com. Thanks again for listening, and have a good afternoon.

That concludes today's conference call. You may now disconnect.