Power Integrations Inc (POWI) 2002 Q3 法說會逐字稿

Welcome to Power Integrations 3rd quarter conference call. This call is being recorded. At this time I'll turn it over to John Cobb.

Good afternoon thing you for joining us to discuss Power Integrations third quarter results. I am John Cobb and with me is Balu Balakrishnan, President and CEO. Before I begin with an overview of the quarter I would like to remind that you that today's call will include forward looking statements reflecting management's current forecasts of certain aspects of the companies business. Forward looking statements are denoted by such phrases as 'believes', 'anticipates' and other phrases that express an outlook towards forward looking future events. We also may make forward looking statements in response to your questions. These are subject to risk and uncertainties which may cause actual results to differ materially from those which are projected or implied in our statements. Risks and uncertainties effecting our business could cause actual results to differ materially and are discussed in our most recent report on forms 10-K and 10-Q filed with the SEC. I will now turn the call over to Balu. Balu?

Thank you John and good afternoon. I'd like to begin by saying we are pleased with the results of 3rd quarter. In a very challenging market we not only met our revenue and EPS projections, but we also shipped a record number of units. The company to gain share as markets migrate towards highly integrated solutions. We also strengthened our balance sheet generating in excess of $7 million in cash. We are confident that we are now tracking to the higher end of our guidance at the beginning of the year of 10 to 15 percent revenue growth and 25 to 30 cents EPS for 2002. We're also pleased with significant manufacturing cost reductions we have achieved during the quarter. We have improved yields and test times and reduced packaging and silicon costs. In addition, we are processing higher volume in tests, which reduces our per unit cost. We expect this savings to flow through our inventory, resulting in improved gross margins beginning in the first quarter of 2003. During the 3rd quarter we continued to see the positive impact of our efforts to diversify end market and broaden customer base. This strategy combined with our success in penetrating existing marks has allowed us to grow despite weakness in our end markets. In our communications segment for example, we have increased the YTD cell phone charger revenue by 47 percent compared to the same period last year. While the cell phone market has remained flat.

Our customer base for this application is more diversified now that it ha ever been with more than 75 customers worldwide. Also over 10 percent of the cell phone revenue in the third quarter came from numerous customers in china, who build chargers for the fast growing local market. Now I'd like to talk about our performance in each of the market segments. Revenues from communications segment grew sequentially mainly driven broadened customer base and market penetration in cell phone application.

Revenues from the computer segment were sequentially flat for the Q3. The fast strength in the PC standby (ph) which compensated for the weakness in PDAs. PC standby was driven largely by the growing demand of energy efficiency, which I will touch upon later in the call. Revenues from the consumer segment were down sequentially, mainly due to the seasonal decline for demand in air conditioning systems and general weakens in consumer electronics. In line with our expectations or industrial and other segment were flat for the 2nd quarter.

Now I would like to provide you with our updated forecast for the revenue mix in our markets for the full year 2002:

Communications - 42 percent Consumer - 25 percent Computer - 21 percent Industrial - 6 percent Other - 6 percent

These changes are the result of the strength that we have experienced in the communications segments in the quarter. I will now discuss the design activity in GX and TinySwitch2 and then move onto new products.

I have stated before that we expect GX and TinySwitch2 to account for most of the productive revenue growth in 2002. In Q3 we achieved more design wins than in Q2. We also expect design wins on this products to continue over the next several quarters contributing significantly to the revenue growth in 03 and 04.

In Q3 we achieved GX design wins in all four of our major markets. We have significant design wins in audio amplifiers and boxes in the consumer segment. LCD monitors in the consumer segment and industrial chargers in the industrial segment. Just to remind everyone, TinySwitch family, expanse of a cost effective power range over to a 250W. TinySwitch2 which targets applications in the 2-20W range continued to experience strong design wins during the quarter. A significant part of the design activity was in cell phone applications in the communications segment followed by PC standby, PDA and monitor applications in the computer segment and computer appliances in the computer segment.

There were also several design wins in the industrial segment. Our updated 2002 forecast for our product families as a percentage of revenues is TOPSwitch 1 and 2 at 33%, TopSwitch- FX and GX - at 23 percent, TinySwitch I and II at 43 and all other at 1 percent. This change is a result of accelerated acceptance of all our products, especially TinySwitch2.

Turning to our new products, the DPA switch and the LinkSwitch. DPA stands for distributed power architecture which has been used in telecom, networking, computer server and industrial applications. DPA switch-card family which was introduced in June, dramatically reduces the part count and board space in 24 and 484 applications over the 0-100W range. By opening an entirely new market and customer base, DPA switch will further advance us in diversifying our revenues. To date, we have sampled most major OEMs and merchants and are receiving excellent feedback from clients. Initial indications are that we are on track to generate meaningful revenue starting in the middle of 2003, which is consistent with our historic design time.

LKS, formally announced in September stands for linear killer switch, and is intended to replace linear transformer based chargers and adaptors in the 0-3W range. We have sampled most of the high volume customers and are now working closely with many of these customers to get to get our product design in. Most of these companies are merchant power supply companies who supply chargers and adapters for cell phone, cordless phones, portable audio and other products. We are also working closely with OEMs to make them available system level benefits of LinkSwitch over linear transformers such as size, weight, energy efficiency and a single design for worldwide use. Savings in inventory shipping and packaging costs are direct benefits to the OEM. As we expected, this is creating significant OEM interest in link-switch. The initial indications on this product are also very positive. And as the DPA switch, we remain confident that link-switch will begin creating revenues by the end of next year. I'd like to remind you that LinkSwitch and tiny switch 2 and GX enables us to cost effectively address the AC-DC market over the entire range of 0-250W for the first time in the history of the company. This is significant because the expanded power range covers over 90 percent of all AC-DC power supplies used world wide and have more than doubled our addressable market to 1.6 billion.

Specifically these products cost effectively address the following power ranges: Link switch 0 to 3 watts. Tiny switch 2 to 20-watt,. Top switch GX 10 to 250 watts. On the energy efficiency front we are pleased to see that Tiny Switch 2 is designed into PC standby power supply that are being shipped to two major US OEMs and a major Japanese OEM in order to meet the 1W executive order signed by President Bush last year. Over the next several quarters we expect our share of the PC standby market to continue to increase by this 1W requirement. Energy efficiency requirements are also driving the convergence of linear transformer based chargers and adaptors to electronic solutions. Last week the International Energy Agency met in Paris to further discuss tightening up energy efficiency requirements for external adaptors by requiring a minimum efficiency during normal operations. This is in addition to the no-load consumption requirements already adapted by the EU. These new guidelines will make linear transformers obsolete over the next few years. We believe that we are in an enviable position to take advantage of this trend with our LinkSwitch product.

I would now like to give you brief over view of market trends we are observing. Last quarter we talked about stable discrete pricing with increasing lead time for many discrete components. While we are yet to see any meaningful increase in pricing in discrete components as a result of large lead times, the pricing appears to have stabilized over the last two quarters. We have also seen some of our direct competitors increase their lead times and put some of the products on allocation. In the last call, I mentioned that we are experience a shift in order patters. We stated that order rate in 2nd quarter was significantly higher than the run rate that we have seen in the past and believe that it was a result of manufacturers pulling in their orders and trying to get a lead start in the 3rd quarter. This has proven to be correct. Historically our 3rd quarter has been seasonally stronger than the 2nd however this year we see most of the growth in our 2nd quarter with modest growth in the 3rd quarter. We are pleased that even with unexpected shift in orders, we are able to meet the customers demand and remain on tract for annual growth predictions.

In line with historical patterns, we expect our sequential growth in the 4th Q to be modest. Due to the high level of (ph) business we have been experiencing our visibility has been limited, however, based on the information available to date we estimate the revenue in Q4 to be flat to up 4 percent sequentially. So to summarize we mad considerable progress on several fronts this quarter. We met our revenue and EPS projections and strengthened our balance sheet. We also improved manufacturing efficiencies which should have a positive impact on growth margins beginning in the 1st Q of 03. Through the convergence of existing markets we have been able to gain market share and grow our revenues. Going forward our new products will allow us to penetrate additional markets. We continue to lead the industry in innovation, by adding 4 US patents in the third quarter bringing the total to 49 in the US and 58 foreign patents. In conclusion our increased diversification and market penetration have allowed us to grow consistently in a year in whi8h our end markets have been essentially flat. We remain confident in our fundamentals and our ability to grow our business in challenging economic conditions. I will now turn the call over to John to review the financials.

Thank you Balu. As Balu stated we are pleased with our financial performance in the third quarter. We achieved significant manufacturing cost improvements and continued to strengthen our financial position. Now onto the details. Net revenues for Q3 were 28.2 million, a 22 percent increase compared to the 23 million in Q3 01 and a 4 percent increase to the 27.1 million in 02. Our revenue growth in the third quarter was a result of the continuing ramp of TinySwitch2 and top switch GS. In the third quarter our gross margin was 42 percent of net revenue compared to 43.1 percent in Q3 2001 and 42 percent in Q2 2002. We have been continually focused on product cost reduction. The cost reductions that we achieved in prior quarters allowed us to maintain our gross margin in the third quarter despite a continuing mix shift towards our newer products.

As with all our new products, tiny switch 2 and top switch GX have lower gross margins during their initial ramp due to manufacturing inefficiencies. However, as a result of the significantly improved manufacturing efficiencies we achieved in the 3rd quarter, we expect the overall growth margin to increase starting in the first quarter of 2003. Gross margin in the fourth quarter, is expected to be flat to slightly higher compared to the third quarter. Longer term we expect our gross margin to be in a range of 45 - 48 percent. Income from operations in the third quarter was 2.9 million or 10.4 percent of net revenue, compared with 1 million or 4.3 percent in the same period last year and 2.5 million or 9.4 percent to last quarter. Net income after tax in the quarter was 2.3 million or 8.2 percent of net revenue compared with 921,000 or 4 percent in the same period last year and 2.1 million or 7.8 percent last quarter. EPS for Q3 2002 were 8 cents on approximately 29.1 million shares outstanding. This compares with three cents per share for the third quarter of 2001 and 7 cents per share last quarter.

Looking at operating expenses, R&D spending in the third quarter was 3.6 million or 12.6 percent of net revenues compared to 3.6 million or 15.6 percent in the same period last year and 3.6 million or 13.4 percent last quarter. Sales and marketing expenditures which include application engineering were 3.8 million in the third quarter or 13.3 percent of net revenues compared to 3.8 million or 16.5 percent in the same period last year and 3.6 million or 13.4 percent in the prior quarter. G&A spending in the quarter was 1.6 million or 5.7 percent of net revenue. This compares with 1.5 million or 6.7 percent in the same period last year and 1.5 million or 5.7 percent of net revenue in the prior quarter. we have continued to constrain spending. As a result operating expenses in Q3 were flat compared to the same Q last year even though we continued to add head count in strategic areas. Operating expenses as a percentage of revenues declined from 38.8 percent a year ago on 31.7 percent in the 3rd quarter.

Moving to the balance sheet. Our cash at the end of the 3rd quarter 103.6 million increase of 7.2 million dollars from last quarter. In last 12 months, we have increased our cash balance by over $36 million. Net accounts receivable were 8.8 million by end of 3rd which is up from the 8.3 million at the end of the 2nd quarter. DSO's on gross receivables were 34 days compared with 32 days the preceding quarter. Over time we expect the DSO to trend slightly higher. Net inventory was 13.2 million down $800,000 from the 14 million last quarter. Inventory turns in the 3rd quarter increased to 4.9 from 4.5 last quarter. In the fourth quarter, we expect our inventory turn it decrease slightly as we build inventory to reach our target range of 3-4 over the next few quarters.

Our outlook for the next quarter is as follows. Due to the high level of turns business that we continued to experience our visibility remains limited. However, based upon concernedly available information we estimate that our revenue will be flat to up 4 percent sequentially. The gross margin percentage should be flat to slightly higher compared to the third quarter. We expect our operating expenses to increase 1 to 3 percent sequentially as we increase investment in new product and market development. As a result the of above earnings per share for Q4 should be in the range of 8-9 cents. That concludes our prepared remarks. Before we ask for questions we will like to remind you that we will present at the AEA classic conference in San Diego on November 4th. Operate please open the lines for question.

We'll first go to Tory Sandburg (ph) with USB Piper Jaffray.

Sandburg (ph): Good afternoon, it's actually Jeremy calling for Tory. Was wondering if you could talk about your top 250, if you were already shipping it and if so how big is it as a percent of PCs.?

It as it happens with all new products it takes a year before we start generating revenue. So we have sampled the top switch GX 250 to several customers and I'm not exactly sure if we are already shipping but if we are alternate not in significant volume at this time.

Sandburg (ph): And are there and new products planned for 2003.

Absolutely and we are not ready to talk about it at this time.

Sandburg (ph): Okay thanks a lot.

Next we'll go Douglas Whitman (ph) with Whitman Capital (ph).

Whitman (ph): Hey. Can you talk about the revenue outlook looking forward and how you're coming to that gross margin assumption. Currently the estimate is that revenues rise in the 1st quarter over the 4th quarter and that gross margins go up in that quarter as well. Is that what you guys are modeling?

The guidance that we given for the for the fourth quarter is our revenue with the flat to 4 percent sequential growth.

Whitman (ph): I'm talking about the first quarter.

SPEAKER1: Right. I was getting to that. At this time we haven't given any guidance on 2003. We will do that in our next quarter call.

Whitman (ph): Okay do those numbers seem correct or reasonable.

As I said we haven't given guidance on that. We talked about longer term we expect or revenue to grow on a 25 to 30 percent on average annual rate, but in terms of 2003 in total or any specific quarter, we have not provided any guidance.

Could you tell us who was the -- sorry Doug Whitman.

Whitman (ph): I'm looking at the models as they show they go up and try trying to get guidance there.

In the gross margin I think I mentioned in my piece that longer we expect the margins to move up into a range of 45-48 percent.

And now Doug Lee with Banc of America Securities.

Lee (ph): Hi. But I think the question -- typically your first quarters have bounced around a lot. Seasonally flat the fist quarter and sequentially down 8 percent. I know you are in growth mode so its awfully tough to put a stake in the ground. But at this point, looking into the first quarter of next year, is it rational to take an average of the next couple of years or do you think that because some of these new products are ramping up you might still have to offset some of that seasonality?

It's really difficult to tell. Historically Q1 has been a down quarter for us in terms of sequential revenue. Last year Q1 was relatively flat with Q4. Obviously we are ramping products but the market environment is very untypical and so it's really hard to determine our revenue growth versus market pattern, what's going to happen with the Christmas selling season and the sell through, it's difficult ton what it's going it look like.

Lee (ph): That's fair. Let's go back to the quarter you just recorded. Balu can you just give some color on the quarter. You guys delivered really well, how did it work out month by month, in terms of linearity?

In Q3 it was definitely back-end loaded. September was the strongest month and that's quite typical for Q3.

Lee (ph): And do you -- have you seen and trend that you can talk about with respect to October so far.

The beginning back log for the quarter was higher than last quarter. In fact higher than the last 4 quarters. On the other hand of course this quarter is front end loaded because usually October is a strong month for us and November is reasonably strong and December usually falls off because of seasonality.

Lee (ph): So you factored that in our role out in your new guidance.

Correct.

Lee (ph): And then lastly you made a comment about discreet pricing. I didn't quite catch that. I think you made 2 comments. Something about competitors on allocation and in another sentence you talked about how pricing has not been a factor. Can you go over both those issues.

Absolutely. I'll talk about them separately. One is discreet pricing has been stable for the last two quarters. Each though the lead times have gone out the pricing hasn't gone up, but has been stable. Then when we look at direct competitors these are people that provide integrated solutions. What we are finding is that some of our direct competitors have very long lead times and are having problems delivering their products.

Lee (ph): So those are the direct competitors.

That put many people on allocations right now.

Lee (ph): Terrific. One more, with respect to the 4th quarter guidance can you tell us your expectations by end market.

We have given the total year's guidance so that should give you a good idea of what the fourth quarter impact is because we have updated it from last quarter.

Lee (ph): Right okay fair enough thank you.

Next go to Jim Liam (ph) with Pacific Growth Equity.

Liam (ph): Can you talk about 10 percent customers during the September quarter.

We had 3 customers that were over 10 percent. As usual 2 distributors Memec (ph) and Simex (ph) and also Samsung, our one OEMs that was over 10 percent.

Liam (ph): Great. Can you talk about the actual turns percentages for both of September quarter and the expectation for the December quarter to hit the mid-point of the guidance.

The term in the 3rd quarter were 65 percent and for the mid-point of our guidance we would need 60 percent turns this quarter. Q4 is generally front-end loaded which is why we need less turns at this point in time to achieve our guidance.

Liam (ph): Thanks. Can you talk Balu, on the comparative landscape in the DPA switch market?

Well we essentially replaced discrete components made by other analogue companies. So it's somewhat similar in terms of what we replace. We replace about 50 to 150 components depending on the application. But the different of course is that the components that we are replacing here are much more expensive components so we expect to make higher margins on the DPA switch product line compared to AC-DC products.

Liam (ph): Thank you very much.

And next go to Gauge Richard with First Albany.

Richard (ph): Couple questions what was the average ASP for the quarter?

50 cents.

Richard (ph): 50 cents.

Yes.

Richard (ph): Okay and then sequentially tiny switch grew roughly 30 percent is that a good guess.

Well we updated the guidance for the year and we don't typically split out individual products like that.

Richard (ph): Am I in the ball park.

We had good growth in tiny switch 2, during the quarter. Tiny switch 2 definitely grew very nicely this quarter.

Richard (ph): Okay and then can you talk a little bit about the royalty line. I noticed this popped up a little bit in the quarter. Is that just noise or is Mac giving some traction in Japan.

I would put if in the noise category.

Richard (ph): Okay great thanks a lot.

Next go to Todd Cooper with Steven.

Cooper (ph): Can you educate us on the type of applications that you are getting design wins for the higher power top switch GX.

Yes we are looking at several different applications, one is the set-top boxes that are high end that require approximately 50 to 60 watts because they have disk-drives built into them and it's one area we have a lot of design activity. The second one is LCD monitor which range from 45 to 60, even 70 watts. The third one is audio amplifiers. We have had many design wins in audio amplifiers and that's growing very nicely especially in the third quarter. These are essentially high power audio amplifiers, 100-watt to 200-watts audio amplifiers and top-switch GX is used to power them.

The last one is the PC main power supply. I think I mentioned this in last conference call that we had a design win with Compaq and Compaq is actually shipping right now there EVO(ph) product line, which is very slim desktop product that uses GX as a main power supply. It also uses our chip in the standby power supply. Now we also had a design win in the desktop main in Q3 which was a small volume. But we are working with 2 or 3 major PC main power supply manufacturers to get design into the main power supply. That will take some time however because that is a very complex design and generally the customers want to take their time designing us in. That's something we look forward to for growth in 2003 and 2004.

Cooper (ph): Thank you and one more if I may. From your perspective have you seen change necessary competitive landscape and more specifically with regard to new products.

Not really, the only change you seeing is that some of competitors are having difficult supplying parts and we don't know if it's because of capacity issues or because they want to make more profitable products. We don't know but we have had customers who have came to us because they could not get competitive parts.

Cooper (ph): Okay thank you very much.

Next go to Shawn Slayton with Ferris Baker Watts.

Slayton (ph): High. Nice quarter. I apologize if you already answered this but can you tell me your top end customers.

Again.

Slayton (ph): Top 10 percent or greater customers.

2 distributors Memec and Simex (ph) and then Samsung.

Slayton (ph): That's the same as last quarter.

Correct.

Slayton (ph): And can you talk about inventory. Your building inventory in Q4 is that, can you speak about that a little bit.

No are our model has inventory in the level of 3-4 turns. Last couple quarters we were under that so we would like to get our inventory back to our model range.

Slayton (ph): Okay very good. That's all I have now thanks.

Next go to Rick Frost, Adam Harknest and Hill (ph)

Frost (ph): High. Can you gives us a sense of when the higher gross margin inventory starts to get sold in Q1 and your margin improves, what kind of magnitude you are looking at?

The impact will begin to flow through in Q1. We haven't specifically provided guidance on anything in 2003. However, as we've said all along, we made significant cost reductions in Q3 which will begin to flow through in Q1 and we expect by the end of next year to be in a range of 45 to 48 percent and we'll start seeing improvement in Q 1. But specifically we haven't provided guidance -- it will be dependent heavily on the on the mix of product in Q1 and how much of the inventory we ship out in Q4.

Frost (ph): Okay. Thanks a lot.

And now we go to Brett Miller with AG Edwards.

Miller (ph): Couple things to follow-up that question just asked. The 45-48 percent range, is there a specific revenue level that you are targeting or is that just internal current run rates.

It's not really dependent on the revenue level. Its more dependent on the cost reductions that we achieve in Q3 and cost reductions that we would get in next year. But revenue is not really a factor in achieving that target.

Miller (ph): Okay if you could look at the next -- looking at Q3 and then if look forward to Q4 -- are you looking at more design wins to be in the mobile or fixed device, the broader device space?

When you say mobile are you talking about wireless cell phones?

Miller (ph): I guess wireless, PDAs, notebooks, those types of things.

Well we expect to increase our market share in all of our markets and that has been true all of this year and that will continue next year and on top of that of course we will have the revenues from DPA switch and the LinkSwitch which will flow in the 2nd half of next year. And the LinkSwitch is in both wireless and also in cordless phones and audio products. Anything that has a transformer could be a candidate for a LinkSwitch. And DPA is just very different. It's a totally new market with the AC-DC converters. So I guess the answer is we will -- we believe we will expand in all of the markets that we are in.

Miller (ph): Okay and if I can ask one housecleaning question. What was depreciation and amortization and capex in the quarter?

Depreciation was 1.7 million, capital spending of 1.3 million.

We have a follow up from Jim Liam

Liam (ph): You guys talked about the some of the competitors for the integrated solutions being either on allocations or on stretching lead times. I just wanted to see if you could comment on the discrete market to see if there is any sense that lead times are coming in and any pricing pressure in the discreet market.

We haven't really seen any change in the discreet pricing over the last 2 quarters. The lead times for the extent we can tell are along compared to what we have. We have 4 weeks or less lead times and discreet is typically much longer than that.

Liam (ph): So you haven't see the kind of increased pricing pressure or oversupply that some of the players in the discreet markets have talked about when they lowered Q4 guidance.

That's correct we haven't seen that from our customers.

Liam (ph): Thank you.

A question from Andrew Headland with FMA.

Headland (ph): High I just wanted to breakdown your gross margin guidance in 2003. How much of that is driven by higher ASP and higher gross on the LinkSwitch and what is going on at your foundries in terms of the movements in geometry.

The gross margin improvements that we are talking about are basically driven by manufacturing cost reductions. And I mention it comes from reduction in test costs, package costs and silicon costs. We have gotten better prices on our package in silicon costs and done a lot of work to reduce our test time, improve our yield so that our test costs are much lower. So that's a relatively independent of ASP. Now the DPA switch will have higher margins but only start generating material revenue from the middle of next year but the margin improvements we talked about for Q1 are for GX and tiny 2.

Headland (ph): So is that 45 to 48 percent assume a similar time of market we have now or do you assume some sort of a more rational pricing environment from the discretes.

We are not assuming that discretes will go up but we are assuming they will stay where they are. From everything we can tell it seems they have bottomed out.

Headland (ph): Can you give us any guidance on ASP for the DPA link-switch.

The DPA is in the range of $1.50 but you have to remember it's a family of products so just giving you the middle of the range. The family covers a 0 to 100-watt range, obviously the ones at the lower watt level will be lower ASP and the ones at the higher will be higher. And the link-switch is approximately 35 cent ASP. It's our lowest ASP product.

Headland (ph): Thank you.

No further questions at this time I'd like to turn the call back to Balu for closing remarks.

Thank you for joining us today and we look forward to seeing you at the upcoming conferences. Thank you.

This concludes the conference and thank you for your participation