Power Integrations Inc (POWI) 2002 Q2 法說會逐字稿

Please stand by, we're about to begin. Good day, everyone, and welcome to the Power Integrations second-quarter 2002 earnings results conference call. Today's call is being recorded. At this time, I would like to turn the conference over to the chief financial officer, Mr. John Cobb. Please go ahead, sir.

Good afternoon. Thank you for joining us this afternoon to discuss Power Integrations' second-quarter results. I am John Cobb, chief financial officer of Power Integrations, and with me today is Balu Balakrishnan, president and chief executive officer. Before we begin with an overview of the quarter, I would like to remind you that our discussion today will include forward-looking statements reflecting management's current forecasts of certain aspects of the company's future business. Forward-looking statements are denoted by such phrases and words as will, believe, should, expect, if, outlook, anticipate, and similar expressions that look toward future events or performance.

Forward-looking statements are based on current information that we have assessed but which, by its nature, is dynamic and subject to rapid and even abrupt changes. We may also make forward-looking statements in response to your questions. 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.

Risks and uncertainties affecting our business which could cause actual results to differ materially are discussed in our most recent reports on Forms 10-K and 10-Q filed with the Securities and Exchange Commission.

I will now turn the call over to Balu, who will take you through an overview of the business. Balu?

Thank you, John, and good afternoon. I'd like to begin by saying that I'm extremely pleased with the results of the second quarter. We exceeded expectations for both revenue and earnings per share, growing sequentially 15% and 40% respectively, and shipped a record number of units.

We also significantly strengthened our balance sheet, generating in excess of $12 million in cash and reducing inventory by $5.6 million.

We believe that we are on track to meet the 10 to 15% revenue growth for 2002 that we projected at the beginning of this year.

I am also pleased to announce that we released the production of both the DC to DC and linear replacement products. For the first time in the history of our company, we are able to offer products that cost-effectively address the entire zero to 250-watt range in the AC to DC market, and zero to hundred watt range in the DC to DC market. These new products, in combination with TinySwitch-II and TOPSwitch-GX, introduced a little over a year ago, have more than doubled our addressable market to $1.6 billion. I'll talk more about the new products and markets later in the call.

We are particularly pleased that the revenue growth in the second quarter was driven by strength across all of our market segments. As many of you know, a key strategy for Power Integrations has been to diversify revenue streams by broadening our target markets and customers.

By expanding our product offerings to cover the entire power range of our target markets, we have made significant progress in achieving this objective.

Also, since the focus on converting old technology in existing markets to highly integrated solutions, we can grow despite the performance of our end markets. Our success in converting these markets helps to achieve positive results in what remains a very challenging economic environment.

I will now talk more specifically about the performance in each of the market segments.

In the computer market segment, we are pleased to have achieved sequentially growth despite overall softness in the PC market. The growth was driven by LCD monitor applications and PDAs. We continue to see design activities in this market and believe we will again achieve sequential growth despite the continued weakness in the PC market.

Revenues from our consumer market segment also grew sequentially, driven by home appliance applications and DVD. We anticipate this market segment to grow at a modest rate in the third quarter.

In line with our expectations, the majority of the growth in the communications market segment came from cell phone charger applications. Our strength in this application is a result of a number of TinySwitch-II 2 design wins. Once again, we are pleased to see that we are growing our revenue in this essentially stagnant market by gaining market share. We expect flat to modest growth in the third quarter.

Growth in the industrial market segment was driven largely by motor control and UPS power supplies. We expect this segment to remain literally flat in the third quarter. We also experienced sequential growth in our other segment during the quarter. The increase is partly attributable to the fact that we are penetrating markets that we have yet to categorize.

Also, we derive much of our business through merchant suppliers and our access to end user information is somewhat limited.

The expansion of this segment further demonstrates that our diversification model is working.

Now I would like to provide you with our updated forecast of our revenue mix by market for the full year 2002.

Communications, 39%. Consumer, 26%. Computer, 23%. Industrial, 6%. And other, 6%.

These changes are a result of the strength we have experienced in the communications and our other market segment during the quarter, and we expect these areas to remain strong throughout 2002.

I will now discuss the design activity on TOPSwitch-GX and TinySwitch-II 2 and then I'll move on to new products.

As I stated last quarter, we expected - we expect TOPSwitch-GX and TinySwitch-II to account for most of the predicted 10 to 15% revenue growth in 2002. We also expect design wins on these products to continue over the next several quarters, contributing significantly to revenue growth in 2003 and 2004.

In the second quarter, we had TOPSwitch-GX design wins in LCD monitor, set-top boxes, server standby, network hub and industrial power supplies. Just to remind everyone, the TOPSwitch-GX family expands the cost-effective power range to over 250 watts.

TinySwitch-II, which targets applications in the 2 to 20-watt range continued to achieve strong design wins during the quarter. Most of the activity was in cell phone chargers, PC standby, consumer appliances, and industrial control. Our updated 2002 forecast for our product families as a percentage of revenue is: TOPSwitch I and II at 35%, TOPSwitch FX and GX at 24%, TinySwitch I and II at 40%, and all other at 1%.

This change is the result of accelerated acceptance of our newer products, especially TinySwitch-II.

Turning to our new products, as I mentioned earlier, both the DC to DC product and the leading replacement product families have been released to production. On June 25th, we formally announced the availability of DC to DC products, which is called a DPA-switch. DPA stands for distributed power architecture, which has been used extensively in telecom and networking applications. This architecture has now spread to computer servers, and industrial applications. The distributed power architecture is also expected to be used in many other high-volume applications in the future, such as automobiles and desktop PCs. The DPA switch product family dramatically reduces the part count and the board space in 24 and 48-volt input applications over the zero to hundred watt range. This product line significantly advances and further diversifies revenues by opening up an entirely new market and customer base.

Due to long customer design end cycles, we expect the - expect to generate meaningful revenue from this product family beginning in the middle of 2003. The linear replacement product which is now called the Link Switch will be formally announced in September. Link Switch stands for linear killer switch and is intended to replace linear transformer based chargers and adapters in the zero to 3-watt range. This product family uses a revolutionary patented technology that significantly narrows the price gap with low-end linear transformer based solutions. Link Switch makes our solutions much more attractive for replacing both slow and mid-rate charger and adapters that currently use linear transformers.

The low-end power supply market is dominated by a few high-volume manufacturers. We have already sampled most high-volume players in this market, and we are working closely with them on product evaluation and design-in. We have intentionally delayed the formal announcement of this product to September, to allow us to focus on these large customers first.

Preliminary feedback on both of these products is very positive. We look forward to updating you on the progress of design activities in future quarters.

Link Switch in combination with TinySwitch-II and TOPSwitch-GX for the first time in the company's history enables us to cost-effectively address the entire range of zero to 250 watts. This power range covers over 90% of all AC to DC power supplies used worldwide. Specifically, these products address the following power ranges: Link Switch, zero to 3 watts; TinySwitch 2 to 20 watts; and TOPSwitch-GX, 10 to 250 watts.

I would now like to give you a brief overview of market trends that we are observing.

In the last call, I mentioned that the uniform rate of our customer orders in Q4 and Q1 indicated to us that the orders reflected the end market demand. However, in Q2, we experienced a shift in order patterns. The order rate in Q2 was significantly higher than the run rates you've seen in the past. Historically, we have experienced strong seasonal growth in the third quarter. It now appears that as leading times on other power supply components lengthen, many manufacturers pulled in their orders and decided to get a head start on Q3. We believe this is parcel responsible for the significantly higher than expected revenue growth in Q2, and as a consequence, we expect our sequential growth in Q3 to be modest, as compared to historical patterns.

Also, due to the high level of turns business we have been experiencing, our visibility continues to be limited. Based on information available to date, I would estimate that sequential growth in Q3 is in the range of 2 to 6%. As expected, we saw lead times lengthen for discrete components. However, we have yet to see any meaningful impact on pricing for these components. Despite the competitive pricing environment, we have continued to gain market share. We have also seen some of our direct competitors significantly increase their lead times and put some of their products on allocation.

In the energy-efficiency front, we continue to see governments and manufacturers demanding increased standby efficiency, and also requiring it on a wider range of products.

For example, a recent TOPSwitch-GX design in a DVD application for a large Japanese OEM was driven by a hundred milliwatt standby requirement. Thanks to [inaudible] smart technology, TOPSwitch-GX is able to keep the DVD alive in standby, ready to respond to remote control, without exceeding this stringent specification.

Going forward, we believe energy-efficiency is going to be the most important market driver for our products.

To summarize, we made significant progress in several fronts in the second quarter. We achieved better than expected financial results, significantly strengthened our balance sheet. Both DPS switch and Ling switch were released to production. We continue to lead the industry through innovation by adding three U.S. patents and six foreign patents, bringing the totals to 45 U.S. and 58 foreign patents. It is very clear that our diversification strategy is working.

Our new products are enabling us it penetrate new markets as well as accelerate the conversion of existing markets. In conclusion, our fundamentals are as strong as ever, and our outlook for the future is bright.

I will now turn the call over to John to review the financials. John?

Thank you, Balu. As Balu stated, we are very pleased with our performance in the second quarter. We had record unit shipments, exceeded our revenue and profit expectations, and further strengthened our financial position.

Now, on to the details.

Net revenues for the second quarter were $27.1 million compared to $21.2 million reported in the same period last year and $23.7 million reported for the first quarter. Our revenues in the second quarter were higher than originally expected, due to stronger demand in all of our market segments.

As previously stated, we had the highest volume of unit shipments in the company's history.

In the second quarter, our gross margin was 42% of net revenues, compared to 44% in the second quarter of 2001, and 43.5% last quarter. Our gross margin percentage was lower than expected, as we shipped significantly more TinySwitch-II than originally forecasted.

As with all of our products during their initial ramp phase, TinySwitch-II has lower gross margins due to manufacturing inefficiencies. As we continue to ramp the product, we expect the margins to improve.

In the third quarter, the overall gross margin should be similar to the second quarter. Income from operations in the second quarter was $2.5 million, or 9.4% of net revenues, compared to $385,000 or 1.8% in the same period last year and $1.9 million or 7.9% last quarter.

Net income after tax for the second quarter was $2.1 million, or 7.8% of net revenues, compared with $670,000 or 3.2% in the same period last year, and $1.6 million or 6.7% last quarter.

Earnings per share for the second quarter of 2002 were 7 cents per share on approximately 29.9 million shares outstanding. This compares with 2 cents per share for the second quarter of 2001 and 5 cents per share last quarter.

Looking at operating expenses, R and D spending in the second quarter was $3.6 million or 13.4% of net revenues compared to $3.7 million or 17.4% in the same period last year and $3.6 million or 15.2% last quarter.

Sales and marketing expenditures, which include applications engineering, were $3.6 million in the second quarter or 13.4% of net revenues, compared to $3.8 million or 18.1% in the same period last year and $3.4 million or 14.4% in the prior quarter.

G and A spending in the second quarter was $1.5 million, or 5.7% of net revenues. This compares with $1.4 million or 6.7% in the same period last year, and $1.4 million or 6% of net revenues in the prior quarter.

Overall, our operating expenses were lower in the second quarter compared with the same period last year. Sequentially, the expenses rose 5% due, mainly, to increased investment on new product and market development.

In the third quarter, our operating expenses are expected to increase 2 to 3% sequentially.

Moving to the balance sheet, our cash at the end of the second quarter was $96.4 million, an increase of $12.3 million from last quarter. In the last 12 months, we have increased our cash balance nearly $29 million. Net accounts receivables were $8.3 million at the end of the second quarter, which is up from the 7.6 million at the end of the first quarter. Days sales outstanding on gross receivables at the end of the second quarter were 32 days compared to 34 days the preceding quarter.

Over time, we expect the DSO to trend slightly higher.

Net inventory at the end of the second quarter was $14 million, down $5.6 million from the $19.6 million last quarter. We have reduced our inventory nearly $10 million in the last two quarters. The inventory turns in the second quarter increased to 4.5 from 2.7 last quarter. In the third quarter, we expect our inventory turns to be in our target range of 3 to 4.

Our financial outlook for the third quarter is as follows: Due to the high level of turns business we've been experiencing, our visibility continues to be limited. However, based upon current available information, we estimate our revenue will grow 2 to 6% sequentially, with the growth occurring in TinySwitch-II and TOPSwitch-GX. The gross margin percentage should be similar to the second quarter. We expect our operating expenses to increase 2 to 3% sequentially, as we increase investment on new product and market development.

As a result of the above, earnings per share in the third quarter should be in the range of 7 to 9 cents.

For the full year 2002, we expect our revenues to be within the range of our previous guidance of 10 to 15% growth. We also expect EPS to be within the range of our previous guidance of 25 to 30 cents per share.

That concludes our prepared remarks. Before we ask for questions, we would like to remind you that we will be presenting at the U.S. Bancorp Piper Jaffray conference in Boston on August 6th, and at the Adams, Harkness and Hill conference in Boston on August 7th.

Operator, can you please open the lines for questions? 00:24:52

Thank you. At this time, if you would like to ask a question, please press the star key followed by the digit 1 on your touch-tone telephone. Once again, to ask a question at this time, press star 1 on your touch-tone telephone.

And we'll take our first question from [Torey Swanburg] with U.S. Bankcorp.

Yes. Good afternoon. Good quarter in a tough environment. A couple of questions. John, you mentioned that the visibility remains limited and you're doing a lot of turns. Could you perhaps quantify that a little bit more, what it was this quarter and what you expect to achieve your guidance going forward?

In the second quarter, we had the same level of turns business as we did in the first quarter, which was approximately 70%, and for this quarter, based on the guidance that we provided, we would need turns in the mid-60s. However, those numbers are not comparable, as we mentioned in the earlier comment. What we saw in the second quarter is some people ordering farther in advance than what they had previously. So while we still have a high degree of turns business, to achieve the same numbers that we've had in the past, we would need to be in the mid-60s.

Very good. And Balu, you indicated that lead times have been stretching for some discrete component vendors out there but that pricing still remains fairly competitive or low. Where do we typically see lead times or where would lead times have to be in order for pricing to stabilize or even edge upwards, you think?

Well, our understanding is that it is not a capacity issue as much as it is a sudden increase in demand that happened in Q2. Maybe - we think it's due to the panic of increasing lead times. So until there is a capacity issue, we don't expect the discrete prices to go up.

Very good. And also on your DPA switch, you mentioned you're going to be initially targeting telecom and network applications, with perhaps other areas like servers and industrial and automotive later on.

Could you give us a little bit more of a time line for that? You mentioned revenues in mid-2003, but help us understand a little bit when you expect to get revenue from each of those end markets.

Well, it generally takes approximately a year, plus or minus three months, after we introduce a product before we start seeing meaningful revenue, so - and that's been our experience in the AC to DC market, and we believe it won't be any different in the DC to DC market.

So we have sampled all of the key customers on our list, and we'll follow through with them and we'll update you on a quarterly basis how we are doing in terms of design wins.

So far, the feedback has been extremely positive.

Very good. And finally, one final question. On the linear killer product, I think you indicated that it really closes the gap on pricing with discrete components. What are some of the initial applications you're targeting there? Is it cell phone chargers or any other areas?

Well, there are about 800 million to 1 billion transformer-based power suppliers in the zero to three watt range. If you go around your house, you'll find probably at least a dozen, maybe as much as 15 transformers, that power everything from a keyboard to a modem to a cordless phone to a baby monitor and so on. So there are a lot of different applications, and certainly a cell phone is one of them and cordless phone is a big one.

Very good. Thank you again.

You're welcome.

We'll go next to Shawn Slayton, Farris Baker Watts.

Hi, guys. Congratulations on a nice quarter. Just a couple quick questions. Your 10% customers, are those the usual suspects, so to speak?

Yes. We had two distribution customers that were over 10%, [Insight] and [Sinix] and then we also had one OEM that was over 10%, and that was Samsung.

Okay. And also, John, can you just tell us your cash flow from ops and capex?

Cash flow from operations just was under $10 million for the quarter. And capital spending was about a half million dollars.

Okay. And also, Balu, can you characterize for us a little bit - or refresh us regarding your exposure to the PC market? In that, obviously there's - we're seeing a softening in the rate of growth going here towards the end of 2002 and perhaps into 2003. Can you tell us how you're able to continue to anticipate a ramp in that segment of your business, in light of that? Thanks.

Sure, Shawn. As you know, we have played in the PC standby market for a long time now, and we have a reasonable market share, but we're also getting into some new markets, which is the LCD monitor and the PDA market. Both of these markets are growing nicely, and plus it's a new market for us, so we are able to grow into those markets. So the PC standby market obviously is tracking relatively with the PC market, although we are getting more market share even in that area.

But the biggest gains we are getting are in the LCD monitors and the PDAs, and based on those design wins, we believe that we'll continue to grow market share in the PC market in spite of the market itself softening.

Okay. So you're - kind of the underpinnings of your estimates aren't predicated on a continued growth in the aggregate PC shipments going forward here.

Correct, correct.

Okay. Thanks very much. I appreciate it.

You're welcome.

We'll go next to Gus Rishard with First Albany.

Yes. Just taking a look at the gross margins for the quarter, they were a little lighter than I had anticipated. Part of it was an increase in shipment in Tiny II, and I was wondering if you could talk about your cost improvements going forward and then if you could handicap the impact of the strength of the dollar on your gross margin line, just how much did it impact you this quarter and how much do you expect it to impact you in the next couple quarters?

Our guidance that we said for the year is still the same, 43 to 45% for the margin, although we expect to be at the lower end of the margin.

We are - or of that range, I should say.

We're making cost improvements in all categories, silicon costs, packaging costs, test time, yields, and particularly on the newer products, the test time and the yields are critical.

In terms of the foreign exchange, as you may be aware, we have an arrangement with both of our foundries where we split the foreign exchange exposure, and then that, combined with the fact that our exposure is just - on the silicon cost, it would, on average, be about a 10 point swing in the yen would impact our gross margin less than 1 percentage point.

In this quarter, it had very little impact on our gross margin, and historically, fluctuations in exchange rates have had little impact on our gross margin.

Okay. And a change in this quarter would affect your COGS next quarter, I'm assuming, so if the yen declined 10% in the second quarter, that would show up in gross margins the following quarter, as that material went through the pipeline, if it were?

Based on the three to four turns that we're in, it would be either in the next quarter or part of the following quarter.

And Gus, if I may add, on the TinySwitch, the die sizes are very small, so the cost of the silicon is a relatively small portion of the total cost. The package and testing tend to dominate. So at least in that product, the impact of the yen would be very minimal.

Okay. And then finally, what was the average selling price for the quarter?

The average selling price for the quarter was 52 cents.

Thanks a lot.

Sure.

Thanks, Gus.

Once again, if you'd like to ask a question, press star 1 on your touch-tone telephone. And we'll move on to Doug Lee, Bank of America.

Hi. This is Brian Bartholomew, actually, subbing in for Doug Lee here. I apologize, I got cut off on part of the call. Did you guys provide a book to bill number for the quarter?

No. We typically don't do that. What we talk about is our turns business, and as we mentioned earlier, our turns last quarter were 70%, and then to meet our forecast for this quarter, we would need about 65% turns. Or the mid-60s.

Okay. Great. And then also, as I look at your last two quarters, you guys have dramatically exceeded guidance, both quarters, and in fact, for this most recent quarter, the June quarter, you were guiding to mid-single digits and you did about 15%. And now you're guiding to 2 to 6% in the September quarter, which is typically pretty strong from a seasonal standpoint.

Is - did some sales get pulled forward? Is that what essentially happened here, or . . .

That's correct. If you look at our bookings, they go out further in time, so we expect less turns business in Q3 compared to previous two quarters, and that's why we are using the mid-60s turns assumption.

Okay. And then as far as the full year guidance of 25 to 30 cents, if I back into that, that looks like assuming the midpoint for this next quarter, that gets me to somewhere between 5 and 10 cents for Q4. What would it take to get the low end of that range? That seems very low, the 5 cents.

I'm not sure how you calculate that. How do you calculate that 5 cents?

Well, just if I look at, you know, you did 5 cents in the March quarter, 7 cents here. If you do 8 cents the next quarter, and then I back into a number for December.

Right.

I get to a - you know, somewhere between 5 and 10 cents.

Right. If - you know, the guidance of the 25 to 30 cents per share, that range is based on, you know, at the lower end of our range, so we said 7 cents, and then without giving you particulars on the fourth quarter, you know, that would imply that at the low end of that range, the fourth quarter would be equal to or slightly lower than the third quarter. However, the high end of that range, if we do the 9 cents and then if we did another 9 cents, we'd be at the high end of the range. So I think the guidance that we gave for the quarter is pretty consistent with the guidance for the year, assuming that Q4 is relatively consistent with Q3, either in terms of the up side or the downside.

Okay. I guess asked a better way, what would it take to get to the high end of that range, 9 or 10 cents for the fourth quarter? What would you need to see, you know, somewhere mid to late this quarter in terms of orders or whatnot?

I think the key is if we meet the high end of our revenue guidance this quarter, then typically Q4 is relatively flat with Q3, so, you know, typically if - if we get to that number in the third quarter, we would get to that higher number in the fourth quarter. If we're at the lower end of the range, then we would most likely, you know, be at the lower end in the fourth quarter also.

It's hard to say, you know, in this environment. This is not typical. We've generally had a strong seasonal growth from Q2 to Q3, but this year is definitely a different year. With the computer market, the communications market, and even the consumer market appearing to be much softer on a sequential growth basis than it's been historically.

Okay. Great. Thank you.

We'll go next to Edward [Hamelgarn] with Shaker Investments.

Did you comment at all about the - you know, what your thoughts are on - in terms of your product inventories at your customers? Could you comment about that and then just - and give some color as to, you know, if your customers see an uptick, you would - you know how that would impact you?

Well, you know, you have to remember that our customers are mostly merchant power supply companies who then supply to OEM customers, and we don't get a lot of data on the OEM customers because they're one step removed from us.

Our own customers, to the best we can tell, they ordered ahead of time in Q2 because they were concerned they won't have any products for the Christmas season, so we believe they do have some inventories.

I mean, when you talk about "some," I mean how does that "some" compare to, you know, prior periods at the end of June?

Well, the prior periods, we didn't think they had any significant inventories at all. That's why we had said that the order rates were so uniform that we felt that the - that it directly reflected the end market demand. We no longer feel that way, based on what happened in Q2. We believe there is some inventory.

All right.

Because people ordered ahead of time.

Can you quantify that or . . .

There's no way for us to quantify that. You know, our customers don't give us that information.

So you're - you don't - you don't really know for sure if they've got -

Well, we - we can tell by the rate at which they order. You know, they ordered a lot in Q2. Their order rates have softened in June and beginning of this month. And that's why we can tell that they have inventory.

Okay. All right. Thanks.

You're welcome.

Once again, press star 1 for any further questions. And we'll take a follow-up question from Gus Rishard, First Albany.

Yes. Can you talk a little bit about the momentum in the cell phone market, how that trended in the quarter, and how you see that in the first part of the third quarter?

From everything we can tell, we are gaining share in the cell phone market. I think I mentioned in the last quarter that there was significant activity in terms of design wins on the TinySwitch-II, and that has translated into significant business for us in the second quarter.

And what will help us going in the future is the Link Switch, because Link Switch will allow us to also address the low end of the cell phone market, which will make us less susceptible to any mix changes going forward in the future.

Of course, you know, the design wins will take approximately a year from now, but once we get Link Switch designed in, then we will not only have much larger share, we'll be less susceptible to any mix changes in the cell phone market.

And are you seeing Tiny II penetrate the mid-rate charger market, and have you seen any penetration in the low-rate charger?

The Tiny II only plays in the mid-rate and the fast charger market, and we have gone - gotten more market share both in the fast charger and the mid-rate for the Tiny II.

And has there been a mix shift among your customers from the low rate to the mid-rate? Is there an increasing - have you seen a shift back up to the higher rate chargers over the last quarter or two? Is that - is that what is moving things or are those buckets staying constant and you're just getting more share in the buckets?

We really do think that there are more high-end chargers, more electronic chargers being used with the cell phones, possibly because the new cell phones require more power, and so on. It does appear that the share of the high-end chargers is increasing.

Got it. Okay. Thank you.

You're welcome.

And at this time, we have no further questions. I would like to turn the call back to our speakers for any additional or closing comments.

Thank you for joining us today, and we look forward to seeing you, at least some of you, at the upcoming conferences. Thank 00:43:20 you.