Power Integrations Inc (POWI) 2003 Q1 法說會逐字稿

Thank you, I am John Cobb, Chief Financial Officer of Power Integrations. And with me is Balu Balakrishnan. I would like to remind you our discussion today will include forward-looking statements reflecting management's -- denoted by such phrases and words as will, belief, should, expect, outlook, anticipate and similar expressions that look toward future events and performance. Forward-looking statements are based on current information we have assessed, but which by it's nature is dynamic and subject to rapid and even abrupt changes. We may make forward-looking statements in response to your questions. They are subject to risks and uncertainties, which may cause actual results to differ materially from those projected or implied in our statement. Risks and uncertainties affecting our business which could cause actual results to differ materially are discussed on form 10k and 10q filed with the securities and exchange commission.

I will now turn the call over to Balu.

Thank you John, and good ach noon everyone. Let me start by saying we are very please world our performance in the first quarter. In extremely challenging business climate we generated revenues of $29.1 million, the high end of our guidance while increasing net income to $3.9m or 13 cents per share. We are especially pleased with our gross margin of 51.8% of operating margin of 18.3%.

Just as important, we continue to gain market share across a broad range of end markets, diversified revenue base is now a significant strength. In the first quarter, for instance, revenue growth in the consumer and industrial segments offset significant weakness in the communications and computer segments.

We are also encouraged by the strong interest in the newest products which we expect to further diversify our revenue.

Our strategies remain on track.

As previous stated, we made significant improvements in manufacturing cost structure last year. In the first quarter we experienced the full benefits of significant cost reductions in silicon packages and substantial improvement in test (inaudible) and yields. As a result of our efforts we're able to increase our gross margins almost 10 percentage points over the last two quarters.

Now onto performance in each of our market segments during the first quarter.

Due to both seasonality and overall weakness in the cell phone market, revenues from our communications segment declined significantly compared with the fourth quarter.

However, our decline was less than the end market decline due to our continuing market penetration.

On a year-over-year basis, our communications revenue was up 37%.

Revenues from the computer segment were also down sequentially from the fourth quarter. A significant decline in P.C. stand by due to a drop in P.C. end market demand was partially offset by growth in P.D.A.'s and L.C.D. Monitors. Revenues from the consumer segment were up significantly over the fourth quarter. This is due to strong market penetration in (inaudible) top boxes and home appliances. Revenues from industrial segment grew nicely across applications including U.P.S., utility meters, motor and industrial controls. First quarter results by end market were consistent with our 2003 forecast, which remains unchanged at communications 41%, consumer 26%, computer 20%, industrial 6%, and other 7%.

Now let me turn to the status of our new products. I am very pleased to say we achieved record level of design wins in the first quarter for both TOPSwitch Gx and TinySwitch-II, The continued adoption of these products, which were introduced 2 years ago and helped drive revenues in the first quarter.

Revenues from TOPSwitch GX nearly doubled while continue today expand reach of highly integrated solutions into a broader range of end markets. TOPSwitch Gx addresses applications between 10 and 250- watts, received design wins in all of our major market segments. In the computer segment, where Top switch GX had strongest showing, had showing in L.C.D. Monitors, projectors and P.C. stand by. In the consumer market, there were a number of design wins in TOPSwitch, audio and home appliances.

TinySwitch-II which targets application between 2 and 20 watts also achieved design wins in all four segments with P.C. stand by, cell phone chargers, home appliances, T.V. stand by and industrial controls. We anticipate the level of design wins for these two product to remain strong over the next several quarters, contributing to revenue growth in 2003, 2004 and beyond.

Turning to our most recently introduced products, DPAswitch and Link-Switch, just to remind everyone, we introduced DPAswitch in June 2002. DPA stands for distributed power architecture which is an architecture that uses 24 and 28 vote to distribute power efficiently. The family dramatically reduces the count and volt space in 24 and 48 volt DC to DC applications up to 100 watts. We are pleased to report in the first quarter we achieved first three design wins, including ISOR phone application.

There's ongoing design activity across all four market target ACDC markets, telephone come and networking infrastructures, phones, servers and industrial. We believe we are on track to see initial revenue from DPA-Switch in the second half of this year.

Link-Switch when we introduced last September is intended to replace bulky and inefficient linear transformer based charger adaptors in the 0-3 watt range. In the first quarter we had first design win for Link-Switch for a cell phone charger application. The ongoing design activity is primarily in cell phones, cordless phones, home appliances and industrial applications. With the level of design activity we have seen to date, we are confident that Link-Switch remains on track to generate revenue in the second half of this year.

Our 2003 forecast for revenue by-product family remains unchanged, TOPSwitch 1 and 2 projected to be at 24%, TOPSwitch at 22%. Tiny switch 1 and 2, 21%, and Link-Switch at 3%.

Now on to the energy efficiency front. Power Integrations remains at the forefront of developing power conversion IC's, to meet the world's growing conservation vision energy needs. In fact we believe our products meet all the current and proposed energy efficiency regulations world wide. The linear based solutions enable are meet many of these requirements. As stricter energy requirements world wide force manufacturers to redesign power supplies, we expect new opportunities to convert markets and customers to our highly integrated solutions.

For these reasons we believe energy efficiency will continue to be a key factor driving our growth. For example, President Bush's 1 watt executive order is continuing to drive TinySwitch-II in design. The three big P.C.OEM's in the US one large in Japan and two Asian PC clone manufacturers are now using TinySwitch-II to meet stringent stand by requirements.

(inaudible) are also being considered for several cordless and answering machine application to meet tighter energy star stand by requirements going to into effect January 2004. Yesterday we announced new member of the Link-Switch family to address the lower end of the applications such as adapters used cordless phones, answering machines and home appliances, this is more cost effective and will enable us to more quickly penetrate the segment of the market.

There are three other items I would like to mention briefly before moving onto our near term outlook.

First, we just entered into contract with typical contingencies to purchase our current San Jose facilities for approximately $30 million.

By taking this action in the current real estate environment we expect to see significant cost savings. The transaction should close at the end of the third quarter. Second, I would like to address any concerns investors may have about the risk of SARS to our business. To date there have been no SARS related obstructions to our logistics and manufacturing, and not aware of any direct impact to our business. At this time it's difficult to know the impact of S.A.R.S. on the impact demand. While we sell more than 80$ of our (inaudible)into Asia, most products that contain our (inaudible) return to United States and Europe for final sale.

We continue to monitor the situation.

Third, we were awarded four U.S. patents in the quarter, bringing our total portfolio to 60 U.S. and 58 foreign patents, this demonstrates leadership and increased barriers to competition in both AC to DC and DC to DC markets.

Now I will talk about our near term outlook. Visibility has become even more limited as evidence by record 75% turns business in the first quarter.

In addition, the uncertainty of SARS and the general economic weakness has resulted in an environment where business forecasting is even more difficult. Based upon information to date, we estimate revenues in the second quarter will be flat to up 4% sequentially. We continue to forecast 48% to 50% gross margins for the year, even though we currently are above slightly this range.

This is due to our proactive market penetrations strategy where re are taking more position to maximize top and bottom line growth. Market penetration remains top priority and helped us to achieve strong financial performance even with little or no growth in our end markets.

To summarize, we are proud of our accomplishments in the first quarter, in an uncertain market environment we not only achieved the high end of our revenue guidance we also exceeded our E.P.S. guidance.

The manufacturing cost improvements we achieved over the last year have taken our margin to a significantly higher level. Our success in diversifying our revenue base helped us to meet revenue goals despite weakness in two segments. We continue to convert from older technologies to new solutions. Our newest products are about to start generating revenue and should provide additional growth and penetration in markets over the next few years. Level of design wins keeps us on track to meet market share growth objectives in 2003.

In conclusion, it remains very confident in fundamentals and ability to grow both top line and bottom line even under challenging market conditions.

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

John?

Thank you Balu, as he explained we had an outstanding first quarter. Experienced flat sequential revenue despite the weakness in communication and computer end markets, these results demonstrate our success n in diversifying our revenue, we are pleased with dramatic increase in gross margin and operating margin. Now, on to the numbers.

Net revenues in the first quarter were 29.1 million increase of 23% from the $23.7 million reported in the same period last year and flat with a $29.2 million reported in the fourth quarter. In the first quarter our gross margin was 41.8% percent of net revenues compared to $43.5 percent in first quarter of 2002 and 47.7% last quarter. As discussed in prior quarters we achieved significant cost reductions in manufacturing.

As a result for our efforts we were able to increase the gross margin from 42% in the third quarter to 51.8% in the first quarter increase of almost 10 percentage points in two quarters. In the second quarter we expect the gross margin to be in a range of 50% to 51%.

Income from operations in the first cart quarter was $5.3 million, and 18.3% of net revenues compared to $29.1 million, or 7.9% in the same period last year and $4.7 million or 16% last quarter.

Net income for the first quarter was $3.9 million or 13.4% of net revenues , compared 0 with $1.6 million or 6.7% in the same period last year and $3.6 million or 12.2% last quarter.

Earnings per share were 13 cents on approximately 30.4 million shares outstanding. This compares with 5 cents per share in the first quarter of 2002 and 12 cents per share last quarter.

Looking at operating expenses, R and D spending was $4.1 million or 14% of net revenues compare world $3.6 million or 15.2% in the same period last year and $3.9 million or 13.3% last quarter.

Sales and marketing expenditures which include applications engineering were $4 million in the first quarter or 13.9% of net revenues compare with $3.4 million or 14.4% in the same period last year and $3.7 million or 1.8% in the prior quarter. G and A spending was $1.6 million or 5.6% of net revenues this compares with $1.4 million or 6% in the same period last year and $1.6 million dollars or 5.6% net revenues in the prior quarter.

Overall operating expenses increased 5.5% sequentially. As we discussed last quarter we are adding sales engineering resource to support growth objectives. In addition investing strategic to support long term capacity requirements and cost objectives such as qualifying additional foundry, and establishing off shore test capability.

Moving to the balance sheet. Cash at end of the first quarter was a $113.1 million, an increase of $3.7 million from last quarter. Net accounts receivable were $9.6 million at the end of the first quarter, an increase from the $8.5 million in the fourth quarter. (inaudible) sales outstanding on net receivables at the end of the quarter were 30 days compared to 26 days the proceeding quarter. Net inventory at the end of the first quarter was $20.6 million increase from the $15 million last quarter.

The inventory turns in the first quarter were 2.7 compare with 4.3 last quarter. In the second quarter we expect inventory turn to increase slightly to reach range of 3 to 4.

Our financial outlook for the second quarter and for 2003 is as follows.

In the second quarter, we expect revenues to be flat to up 4% sequentially. Gross margin is expected to be in the range of 50-51%. Operating expenses expected to increase 4% to 5% sequentially. As I result of the above, earnings per share are expected to be in the range of 11-13 cents.

Our outlook for 2003 remains unchanged. We expect 2003 revenue to increase between 15%, assuming no end market growth and 25% assuming 10% end market growth. We expect gross margin for the year to be in range of 48% to 50%. Earnings per share expected to be 50-65 cents.

That concludes our prepared remarks. We plan to present at J.P. Morgan San Francisco May 7th Deutsche Banc May 14 in Vegas.

US Bank Corp Piper Jaffray, Bear Stearns June 11th. Operator can you please open the lines for questions.

Thank you, at this time if you would like to ask a question press star one on your touch tone telephone. That's the star key followed by the digit one. As a reminder if using a speakerphone, please make sure your mute button is turned off to allow your signal to reach us. Once again, star one for questions. We will take first question from Jim Liang from Pacific growth equities.

Can you talk about 10% customer in the quarter?

As typical we had two distributors more than 10%, CINEX and Memec, and no other customers were more than 10%.

So Samsung dropped below 10 percent?

Yes.

As far as the cell phone endmarket weakness, was that distributed across tier 1 and emerging OEM's?

It was more the tier 1OEM's, others remained flat.

Got you. How do you expect the cell phone end market to perform in the June quarter relative to the March quarter sequentially?

It's too early to tell. But as far as we can tell there's no inventory issues from the bookings we are getting. But it's really early to tell how the tier 1 guys will do.

My guess would be that the other category which consists of over 75 customers primarily in Asia will continue to do better.

Okay, last question. Can you talk about the gross margin upside for the March quarter and also for the rest of the year as far as how the manufacturing efficiency improvements will continue to contribute to the margins. Because the March quarter is 52% and June is 50% to 51%, but for the year you are guiding 48% to% 50 percent. Is there a expected drop of gross margins for the second half of this year?

Yeah, as I mentioned we are taking an aggressive position on pricing because we believe that will give us maximum top line and bottom line growth. And because of that, the overall year will be at 48-50% even though we are slightly above that this quarter and also we will be slightly above in the next quarter.

So do you think pricing is the main issue rather than the ramp of the, let's say the Link-Switch products in the second half of this year?

That's correct.

Okay. Thank you very much.

You are welcome, thanks Jim.

We will go next to Tore Svanberg.

This is actually Jeremy Kwan (ph.) calling for Tore.

Going back to the wireless handset market.

Given your exposure to that market, can you provide insight into the end market make shift between GSM?

I'm frayed we don't have that information because we sell to over 90 customers world wide who are, most of them are actually charger manufacturers who then in turn sell to the O.E.M.'s. And the charger really doesn't change a lot between GSM and CDMA so it's really hard to gather that information.

So you are pretty agnostic between those?

Correct.

Turning to your new products, it looks like you are getting pretty good tracks with Link-Switch and DPA-Switch or

can we expect something different?

We have many products in development, as a practice we have decided not to announce new products until they are introduced into the marketplace, mainly to prevent competitors from knowing about it.

That's fair, thank you very much.

You are welcome.

We will go next to Auguste Richard from First Albany.

What's your expectations for turns for the midpoint of numbers for the quarter?

Approximately 70%.

The inventories jumped to about $5 million sequentially. Can you talk about the increase in inventory, just why that number was up, it kind of stands out?

Sure, actually it was planned. We wanted to build inventory in anticipation of demand in Q2, if you remember last year Q2 was a very strong quarter. We want to make sure we are prepared for it in case it happens again this year. The second thing is the Link-Switch and DPA-Switch being new products we have to build inventory in preparation for production shipments. And the third one is that GX has done extremely well as a mentioned. We almost doubled our revenue in Q1 over Q4. Which also means that from a mixed point of view, we have to build more GX's so that's the reason why our inventory is higher.

Got it. And then, can you just, the contribution to that increase in inventory between those three factors?

Do you have that?

I think probably the first one is the most important, building for the expected demand or what we had last year in terms of the surprised demand into Q2, link and DPA contributed but they were a lesser factor and GPX also contributed but a lesser factor. So really getting prepared for what can happen in Q2 based on what happened last year is probably the biggest factor.

Okay, can you talk about the ODM's in China? I think a third of the mix in communications or cell phones in the fourth quarter. What was the percentage of the mix of that end customer in Q1?

It was definitely higher. And I'm trying to see whether I have that number in here.

Yeah, actually our other revenue and cell phones was flat from Q4 to Q1 , so the decline we saw in cell phones was all in what other people referred to as the tier 1 group.

Like Motorola, Samsung.

Siemens. Nokia and Erikson. So, from Q4 to Q1 our revenue was flat, and the other—all the decline was related to the bigger company.

Got it. Okay, and I think the other question on TOPSwitch in the roll off of that product line, has that start today flatten out in the cannibalization that's occurred in that tiny, beginning to mitigate the sequential declines kind of slowed? Is that a reasonable assumption?

That's a reasonable assumption.

You are referring to TOPSwitch-I and II?

Yes.

They have come down and flattened out a bit.

It's come down and is now sort of (inaudible) to some end of life revenue if you will.

Correct.

Very good guys, thanks a lot.

Thanks Gus.

We will go next to Steve Smigie with Raymond James.

Great quarter guys.

Thanks.

Couple quick questions, first with regards to the Link-Switch product, speaking with some Chinese competitors to that Link-Switch product, in speaking to their customers they said their customers were saying they are not likely to use a Link-Switch product because currently you wouldn't have enough supply for them, so just curious how quickly you could ramp on Link-Switch and maybe address in a concern.

Yeah, that is very strange.

As far as being able to supply large quantities, it's not an issue at all.

Okay.

There is no supply problem.

Another question, Fairchild conference call, I think they mentioned they were planning to compete directly with Power Integrations on some of the more standby, more power efficient products and I was just wondering if you were able to address that or had heard that at all?

So far there is no visible change as far as direct competitors go.

In the future, if there's anything new we will definitely talk about it. Our real competition has always been older technologies, which is the linear transformer on the low end, and discrete electronic power supplies--say about 3 or 4 watts.

Okay. And can you talk maybe a little about how you saw maybe pricing of discretes impacted this quarter and how your pricing was?

The discrete pricing has been relatively stable for high voltage semiconductors and controllers. As I said last quarter, the passing components came in Q4 and appear to be stable at the new level at this point.

Okay. And do you see any pricing of your own, I know you said going forward you would try to bring it down, but did you see pressure?

We proactively decided to tack a more aggressive pricing stand in the market place because we think that will yield bigger top line and bottom line.

And so consequently we are being much more aggressive on our pricing.

Okay, thank you very much.

You are welcome.

And we will go next to Shawn Slayton with Ferris Baker Watts. Good afternoon.

Hi Shawn.

You grew the top line 15% in 2002, and in 2002, we had a pretty big June quarter, I know a lot of your competitors experienced that same larger seasonally June quarter. Obviously you guys aren't predicting that's going to occur this June, can you talk about what you think the seasonality will be and what the relative comparison is to last year?

Last year was an exception, usually our Q3 is our strongest growth quarter, from Q2 to Q3 is where we see most of the growth for the year.

This year we, at least to date, we haven't seen the kind of phenomenon we saw last year, but this quarter is still earlier with the level of turns business we have, things could change. But probably more likely this year it will be similar to the years before last year where Q3 was the strongest quarter.

Okay, and you really can't put your finger on why that occurred?

Well last year, the reason it occurred, which we have actually talked about, is because there was a significant increase in lead time on discrete components, in early Q2. So our customers got scared so they decided to order products and get products ahead of time. It really didn't change the overall consumption for the year.

All it did was it moved most of the growth to Q2 and we had a smaller growth in Q3.

Okay. And also, you guys said you are going to buy your facilities there, yet you have intention to move testing off shore, so are you buying the testing building but are you going to move it off shore or use the testing building to maybe expand your offices, can you talk a little about that?

The testing, we will start to move it off shore beginning this quarter, actually. But it will take several years. We're not going to do it quickly. We are going to do it in a way to maximize our cost structure and even when we are done, we will still have some testing that will be done here for engineering development and early production runs and things like that.

And so it's our expectation that with that, plus with our general growth over time, that we will fill up that space.

Okay. Also, exiting this year, John, can you talk a little about what you expect (inaudible)to be, on absolute basis, relative to your March quarter?

In terms of absolute dollars?

Yeah.

We expect this quarter to go up 4% to 5%. But then maybe just a couple percentage points Q3 and Q4 relatively flat. The largest increases were in Q1 and then in Q2.

As we discussed we have projects that are ongoing, but once we get into Q3 and Q4 there will be some growth but it will be at a lower rate than what we have seen in Q1 and Q2.

Thanks, I will let someone else ask questions.

Next to Robb Adams at Kaufman Brothers.

Great quarter guys.

Can you give us an idea to which have the best visibility in the current quarter?

Do you understand the question?

Yeah. So you are asking on our four markets, communications, computer, consumer, and industrial, which do we have the best visibility in?

Right.

At this point, frankly I think it's pretty consistent across-the-board. There isn't one market significantly better or one that's significantly worse than any of the others. They are about the same in terms of visibility.

Would you say the same for design wins and bookings, pretty consistent in terms of no major directional moves then?

Other than what we talked about in the first quarter where the consumer and industrial did a lot better and if you look at the ratio of revenue between the various market segments, the first quarter was relatively consistent with 2003 projection.

Which has a larger consumer portion.

Okay. Fair enough, thanks very much.

You're welcome.

As a reminder press star one on your touch tone telephone if you have a question, we will go next with Rick Faust.

Most of my questions have been answered but in the cell phone market, in the chargers what do you expect your penetration to be in terms of total chargers sold how many do you think you are in total percentage wise?

If you look at total number of chargers, probably around 25% to 26%.

But if you look at the electronic portion of that, we have a much higher share, about 65% share.

Okay, so total including the bricks it is 25% to 26%, and electronics it's about 65%?

Essentially 40% is electronic, we believe.

Okay, that's great. So obviously, the Link-Switch is what is going to kind of continue your penetration thereby attacking the brick section more?

Right, the 60% of the market has not been available to us until Link-Switch was announced last year. And so we will be able to address all the market including the 60% from this point on ward and should start seeing revenues from Link-Switch in the second half of this year.

Okay. Are there any other markets that you see for any of your products be it G.X. Or TinySwitch-II in other markets you are excited about the penetration opportunities as much?

Absolutely, LCD monitor is a good one. Not only we are penetrating in the market, LCD is replacing CRT monitors so it has a very high growth rate. It's grown 100% last year and you know, it's supposed to go quite significantly this year also.

Another market of course is D.V.D.

D.V.D. is pretty much obsoleted V.C.R.'s and it continues to grow. We are addressing that market both with GX and TinySwitch-II on the lower end. So that's a nice high growth market in the consumer area.

And you are still relatively low penetrations on both those markets, right?

Right.

And is part of the pricing actions, this aggressive action, are you responding in part to competition, or is it just to kind of keep them at bay?

It is more to grow the market. We think that it is better for us to be more aggressive and grow the market than try to get the last percentage point of gross margin. Because the absolute earnings will go up and so will the top line. And we feel that's it's really important that we grow the market when we are the leaders in the market and get as high as share as we can as fast as we can.

Okay. And the Link-Switch and DPA-Switch are not going to have a material impact on margins in the second half?

That's right, they will only be 3% of our total revenue that we expect.

And the other thing to remember is DPA-Switch, even in the beginning has a margin that is greater than our company average because it is going into a D.C.D.C. market. So it will have a positive impact, the Link-Switch will have some negative impact but that will be negligible this year. By the time the next year moves around, we will make significant improvements in Link-Switch.

Thanks a lot guys.

We will go next with Brian Bartholomew with Banc of America Securities.

Do you expect sequential growth in the wireless market in Q2?

In general, at this point of time we expect all of our end market to be in the 0-4% range. None significantly better or worse.

And what was the overall ASP during the quarter and just directionally where do you expect it to go.

It was 50 cents and we expect it to say in that 50 cent range.

Okay, and finally, I'm just curious on the P.C. standby part of things, what do you see as your market penetration in terms of new P.C.'s sold?

It's about 35% for the desktop P.C.'s, because we are only going to desktop, laptops don't have a standby.

Okay and finally, what percentage of the handset revenues came from China in the quarter, I believe you gave that out last quarter.

Last quarter approximately one-third, and this two other two declined where as this one remained flat.

Do you have --

It's about 40%.

40%.

40% of cell phone revenue.

Great, thank you very much.

And we will go next to Jim Liang with Pacific growth equities.

Just a follow-up.

You mentioned Link-Switch designed in the March quarter, can you give us a little more color on that, is that a tier 1OEM or emerging?

It's not a -- well it's a not a very large volume design.

It's a European company that has designed into a cell phone charger.

And that's a charger company and they reell that to the cell phone O.E.M. is that right?

That's right.

Do they supply that to Nokia or is that not the case?

As far as I know it's not a tier 1 end customer.

Got you. Secondly, going back to the inventory, I think John, you mentioned that the biggest factor for the inventory rise was potentially to, if there's a big up take in demand similar to Q2 of last year, then these inventory would be sufficient.

Just wondering, did you guys say that so far into the quarter you have not yet seen the up take?

Well based on the data we know now, at this point, we are projecting 0-4% growth.

Right.

Obviously if we see a much higher bookings rate that would indicate higher we would have given you a higher forecast. But we have a reasonable design cycle time so we have a build inventories a head of time. And if you look at last year when we started Q2, our inventories were 2.7 turns exactly the same as we have now and we barely managed to power our customers with 15% growth we, the unexpected growth we saw in Q2.

So we wanted to make sure if that happens again this year, we are prepared for it. And the cost of the inventory is relatively small expense to us, compared to the benefit that we get out of it.

Great. Thank you very much.

You're welcome.

At this time we have no further questions standing by, 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 the upcoming conferences thank you.

This concludes today's conference call, we thank you for joining us. You may now disconnect.