Power Integrations Inc (POWI) 2009 Q1 法說會逐字稿

Thank you for standing by. Welcome to the first quarter 2009 financial results conference call for Power Integrations. Today's conference is being recorded. Now at this time, it's my pleasure to turn the conference over to Mr. Joe Shiffler. Please go ahead, sir.

Thank you, and good afternoon. I'm Joe Shiffler, director of IR and Corporation Communications for Power Integrations. With me today are Balu Balakrishnan, President and CEO of Power Integrations, and Bill Roeschlein, our CFO.

During today's call, we will make reference to financial measures that are not calculated according to Generally Accepted Accounting Principles. Please refer to today's press release, which is available on our website at www.PowerINT.com for an explanation of our reasons for using such non-GAAP measures, as well as tables reconciling these measures to our GAAP results. Also, our discussion today including the Q&A session will include forward-looking statements reflecting management's current forecast of certain aspects of the company's future business. Forward-looking statements are denoted by such words as will, would, believe, should, expect, outlook, estimate, plan, anticipate, suggest, project, forecast, and similar expression that look toward future events or perform imagines. Forward-looking statements are based on current information that is by its nature dynamic and subject to rapid and even abrupt changes. Our forward-looking statements are subject to risks and uncertainties, which may cause actual results to differ materially from those projected or implied if our statements. Such risks and uncertainties are discussed in today's press release and under the caption Item 1-A, Risk Factors on our form 10-K, on March 2nd 2009.

Lastly, this conference call is the property of Power Integrations and any recording or rebroadcast of this conference call is expressly prohibited without the written consent of Power Integrations. With that, I'll turn the call over to Balu.

Thanks, Joe, and good afternoon. We had an excellent quarter relative to our initial expectations, exceeding our revenue and gross margin forecast, and coming in below our range on non-GAAP operating expenses. Revenues for the quarter were $40.3 million, down 5% sequentially, compared with our forecast of 15 to 25%. We saw a significant improvement in orders as the quarter progressed, and bookings in February and March returned to levels similar to September of last year.

Orders during the first quarter were unusually short-term in nature. In fact, nearly half of our bookings in March were shipped within the month, a much higher than normal percentage. The same was also true for February. Given the volatility and short-term nature of the recent order trends, projecting revenues remains difficult. While we entered the quarter with a significantly higher backlog than the prior quarter, orders have moderated somewhat, following a strong surge in late March and we remain cautious about demand in light of weak global economy.

Taking these factors into consideration, we are projecting revenues of $39 million to $43 million for the second quarter, a range of down 3% to up 7%. While economic downturn is clearly having an impact on end market demand, we are staying focused on the factors within our influence. We are managing our expenses and production costs carefully, minimizing discretionary spending, and streamlining our operations without compromising future growth. We also deployed our cash aggressively, buying back nearly 5 million shares between the first quarter of 2008 and the first quarter of 2009, and also initiating a quarterly dividend in the fourth quarter of 2008. And most importantly, we remain focused on executing our growth strategy, which entails increasing our penetration of sub 50-watt power supply market while also expanding into new markets such as high voltage power supplies and LED lighting. We are pleased with our progress in all these areas.

In the high powered area, we are seeing a high level of customer interest in the two products we introduced last year. A version of TOPSwitch HX for the notebook adapter market and HiperPLC which targets flat panel TVs, LED street lights and ultra-efficient desktop PCs. We have a number of customers actively designing notebook adapters and we now have three design wins at tier 2 customers that should result in modest revenues, beginning in Q3. We also have a number of designs in progress with HiperPLC, which has started to produce revenue towards the later part of this year or early 2010.

We expect to introduce additional products later this year, that will broaden the number of applications we can address in the high power segment of the market. Also, we expect the high power products to expand our addressable market by about 25% to more than $2 billion. The LED lighting market is still in its early stages and we are encouraged by the trends we are seeing, and the traction we are getting with customers. We have seen a strong ramp in design activity, with more than 1,000 opportunities in our pipeline, and more than 200 customers in production. And while the market remains extremely fragmented, LED lighting products are beginning to show up with some well-known brand names attached to them. For example, Wal-Mart and Home Depot are currently selling GE branded bulbs for our track lighting systems, and Ikea now carries a range of LED lamps. Power Integrations products are being used in both of these examples.

It is becoming increasingly clear that the LEDs are the future of lighting and we think we are well positioned to take advantage. LED market plays to our strength. Energy efficiency, small form factors and reliability are crucial, and because many of the customers lack power supply expertise, the simplicity and the ease of use that we provide are proving extremely attractive.

Turning to our traditional core market for sub 50-watt power supplies, we continue to be encouraged by the pace of design activity, despite the economic downturn. While the economy obviously impacts unit shipments, the design of highly integrated power supplies is a secular trend that is largely independent of economic cycles. In fact, as we have said for a long time, we believe the adoption of IC based power supply is accelerating, due in large part to the growing demand for more energy efficient electronic products. As you know, energy efficiency has been a hallmark of our products for more than a decade, and I believe we have an advantage in the market any time high efficiency is a part of a customer's design criteria.

In terms of regulatory push towards efficiency, external power supply standards in California and the US have been the big story for the past couple of years. However, we are now paying a lot more attention to the European eco design program, which is in the process of adopting mandatory standards on a wide range of end products. While development of these standards is a multi-year process, a couple of key standards have been finalized and scheduled for implementation. Specifically, the Euro design standard for external power supplies received final approval from the EU parliament just a couple of weeks ago, and is scheduled to take effect in April 2010. Initially, that standard will be identical to the current mandatory standard in the US, which effectively makes a tighter standard due to Europe's higher input voltages.

In April 2011, the European standard will tighten further, essentially harmonizing with the current voluntary ENERGY STAR specifications in the US. Meanwhile, Europe's horizontal standards for standby consumption received final approval in December and are scheduled to take effect on January 1st of 2010. The standards cover a wide range of end products, including appliances, consumer electronics and computer equipment. The required standby consumption of one watt or less with 2-watts allowed for devices with displays. These limits are scheduled to be lowered by 50% in 2013, which will be a significant challenge in many applications. We are already seeing interest from some customers in meeting these 2013 standards. Particularly in the appliance market. This is a great example of the fact that while regulatory standards are important, some OEMs are now seeing an opportunity to gain market advantage from selling greener products.

Also, last November the top five mobile phone manufacturers introduced a rating scale for cell phone chargers, giving chargers zero to five stars based on the standby power consumption. The five star rating requires consumption of 30 milliwatts or less which is extremely tight compared to the mandatory US standard of 500 mill watts. This is a level that we can easily achieve with our LinkSwitch-II products and we are seeing significant interest in five star designs from at least two of the top five OEMs.

While there has already been a lot of progress towards higher levels of efficiency, I believe we have still just seen the tip of the iceberg. There are numerous other standards in development in Europe, the US and elsewhere. Focusing on end products such as TVs, computers, set-top boxes, printers, air conditioners and many more, and as consumer awareness rises, and demand for products continue to grow, the market may ultimately move even faster than the regulators.

I'll conclude with an update on intellectual property issues where we have had a number of positive developments since our last conference call. First, we announced in February that we achieved a settlement in our litigation against BCD Semiconductor. BCD accepted a court order forbidding the manufacture and sale in the US of products involved in the lawsuit, and the sale of such products for use in end products destined for the US market. We are very pleased with this outcome as it effectively achieved the primary aim of the litigation without the expense of a trial.

With regard to our litigation against Fairchild, you may recall that Delaware court granted our request for a permanent injunction against more than 100 infringing Fairchild products. Although the injunction has been stayed pending the outcome of motion filed by Fairchild with the Court of Appeals, we believe these infringing products have largely been eliminated from the marketplace, which was the principal goal of our lawsuit. We were also awarded $6 million in damages plus interest with the possibility of enhancement of these damages if Fairchild's infringement is found to be willful. A bench trial on the question of willfulness has been scheduled for June 22nd.

Our other outstanding litigation against Fairchild, which involves two of the same patents involved in the earlier case, plus one additional patent, is scheduled for trial in the fall of 2010. Lastly, we are pleased to report that the US Patent Office has concluded its work on the first four of the eight patents submitted for re-examination by Fairchild and its system general subsidiary. All four patents came through the process essentially intact with all key claims upheld as originally written or with minor clarifications. The remaining four patents, which were submitted at a later date than the first four, are still going through the process and we are optimistic that our IP will ultimately be upheld and that Fairchild will be unsuccessful in their efforts to escape the consequences of their infringement.

With that, I will turn it over to Bill for a review of Q1 results. Bill?

Thanks, Balu and good afternoon. Before I run through the results in detail, I'd like to point out a few changes in our reporting for this year. First, we improved our revenue mix reporting by eliminating the other category and assigning those revenues to the appropriate major end market categories. We've also relocated Smart Phone related revenues from the computer market to the communications market. In both cases, we've gone back and adjusted the 2008 numbers. Those numbers are provided in the financial tables of our press release and in the historical financial tables on our investor website. Lastly, you will note that we are now including a cash flow statement in the financial tables provided with our press release.

Turning to the results, as Balu mentioned, we comfortably exceeded our revenue projections for the first quarter, coming in at $40.3 million, down 22% year-over-year, and 5% sequentially. On a sequential basis, revenues from the consumer and industrial end markets were areas of relative strength. Consumer revenues increased by a low single digit percentage led by growth in appliances and air conditioning. Industrial revenues were up slightly, led by growth in metering applications. Revenues from the computer end market were down by a high single digit percentage due to weakness in the desktop PC market. Communications revenues were down mid-teens which was not surprising in light of the strong quarter we had in that market in Q4.

The distribution channel accounted for 67% of revenues for the quarter, while 33% came from direct sales. Channel inventory grew both in dollars and in weeks, increasing to 5.7 weeks from 4.8 at the end of December. This is a higher level than normal, but it's consistent with the strong surge in demand we experienced late if in the quarter. Turns business as a percentage of revenues were in the mid-70s, as high a level as we've had in recent memory. Average selling price for the quarter was $0.33, up $0.01 from the prior quarter, reflecting the relative strength of the industrial and consumer markets, compared with the communications market.

Havenet and ATM are two top distributors, were both 10% customers for the quarter, accounting for 16% and 11% of revenues respectively. Non-GAAP gross margin was 52.4%, up 250 basis points sequentially, and about 2 percentage points above the midpoint of our forecasted range. About half of that upside came from mix. Again, reflecting the strength of the industrial and consumer markets. We also got a 1 point benefit from the sale of fully reserved inventories. Non-GAAP operating expenses for the first quarter were $15.8 million, down about $0.5 million from the prior quarter, and 8% on a year-over-year basis. Litigation expenses for the first quarter were $831,000, below the expected range of $1 million to $1.5 million, due primarily to the settlement of the BCD litigation. We now expect litigation expenses for the year to be in the neighborhood of $4 million, down from our earlier expectations of about $6 million.

Our GAAP operating expenses included $3.8 million of stock-based compensation. That's higher than our forecast, due to our decision to shorten the lookback period on our employee stock purchase plan from 24 months to six months. This change results in non-cash charges of $2.1 million, $1.8 million of which we recognized in Q1 with the remainder coming in Q2. Going forward, the shorter lookback period will result in less dilution and stock-based compensation expense. Other income was $825,000 for the quarter, down about $1 million on a sequential basis, reflecting lower interest rates and the lower cash balance resulting mainly from our stock buyback.

Our non-GAAP tax rate for the quarter was 35.6%, higher than expected, reflecting the impact of the recently passed California budget legislation. That legislation will reduce our state income tax liability substantially, beginning in 2011. And, therefore, reduces our ability to utilize California deferred tax credit. Accordingly, we recognized a charge of about $800,000 in the first quarter to reduce the value of these assets on our balance sheet. Including this charge, we expect our non-GAAP tax rate for fiscal 2009 to be in the 25 to 30% range. For Q2, we should be around the low end of that range. Weighted average share count for the quarter was $28.2 million, down from $28.9 million last quarter, and down 12% from a year ago, reflecting the impact of our buyback. Non-GAAP diluted EPS was $0.14 per share for the first quarter, including an impact of about $0.03 from the write-down of the deferred tax assets.

Turning to the balance sheet, we exited March with $150 million in cash and short-term investments, down about $24 million for the quarter. We used $18 million for share repurchases during the quarter, concluding the second of our two consecutive $50 million buyback programs. Between February 2008 and February 2009, we bought back 4.9 million shares for a total of $100 million. Also during the quarter, we used $9 million for the repurchase of underwater stock options, per the tender offer that we explained on our January call. We repurchased 2.5 million options or about 30% of our overhang, all at prices below their Black-Scholes values. As you may recall, the income statement impact of the tender offer occurred in December, but the cash outlay took place in January and appears on our Q1 cash flow statement.

Accounts receivable increased by $5.2 million in the first quarter, to $18.2 million. While days sales outstanding increased to 41 days, up from 28 days at the end of December. The increases were driven by the surge in orders we experienced late in the quarter and are not an indication of any credit issues among our customers. In fact, we've had no significant problems with collections thus far in spite of the weak economy.

Turning to the outlook, as Balu mentioned, it remains a challenging environment in which to forecast revenues so we're projecting a relatively wide range of $39 million to $43 million. At the midpoint of that range, turns business would be in the mid-60s as a percentage of revenues. We are forecasting a second quarter GAAP gross margin of 48 to 50%, down 300 basis points at the midpoint from the first quarter gross margin of 52%. 100 basis points of that is due to the sale of reserved inventory that helped us in Q1, and is not expected to occur in Q2. Consistent with the commentary we gave on our January call, we also expect a slight impact, perhaps 50 basis points, from lower production levels and roughly 150 basis points from the appreciation of the yen versus the dollar late in 2008. As a reminder, the majority of our wafer purchases are denominated in yen and it takes roughy two quarters for any fluctuation to flow through our income statement. To the extent that the dollar has rebounded somewhat over the past few months, we should see the benefit of that beginning sometime in the third quarter.

We expect total operating expenses for the second quarter to be in the range of $18 million to $19 million, including approximately $3 million of stock-based compensation expenses. That also includes $1 million of litigation expenses. Once again, we expect our Q2 non-GAAP tax rate to be around the low end of the 25 to 30% annual range. Weighted average shares for Q2 should be similar to the Q1 level of $28.2 million. With that, I'll turn it back over to Joe.

Thanks, Bill. We'll move to the Q&A session now and I'd like to ask everyone to limit themselves to one question and a follow-up for the first time around and then we'll be happy to come back for a second round as time permits. Operator, will you please give the Q&A instructions?

Yes. Thank you. (Operator Instructions). And we'll go first to Tore Svanberg, Thomas Weisel Partners.

Hi, thank you. This is Adam Wang calling in for Tore Svanberg. Congratulations on the quarter. I was wondering if you could add a little more color on your high power, high current products. You mentioned that you have now fully engaged two Tier 2 customers. I was wondering if you could talk about other customers that you might be engaging at this time.

Okay. So there were two products we introduced. The one you are talking about is the notebook product. We have design wins at two Tier 2 customers and these are power supplies that power the notebook or netbook, depending on the size of the notebook. And those three customers are ASUSTeK, HP and Acer are the end customers. The second one, the HiperPLC is a high power product for LCD TVs, LED street lighting application and also very high efficiency power supplies for PCs. There we are seeing significant design activity in LCD TV and street lighting application at this moment and we are optimistic that we will get some revenue, either at the end of the year or the beginning of next year.

Great. Thank you very much.

You're welcome.

And we'll go next to Ross Seymore, Deutsche Bank.

Thanks, guys and congrats on the strong quarter. Balu, talk us a little through the bookings trajectory that you talked about in February and March and probably most pointedly what you're seeing in April with a little bit of the moderating that you mentioned?

Okay. So February was stronger than January and March was slightly stronger than February. But more importantly, at the second half of March we had a surge in orders and then in April, the first three weeks of April, it's moderated somewhat. So our thinking is, if you look at the short-term nature of the orders we received in March, it appears that many of the customers were scrambling to get some parts because their inventories were so low. So we think a part of that is replenishment of inventory and not necessarily represents the underlying demand, long-term demand, if you will. The moderation that we've seen in April could represent the underlying demand and we have taken that into account in our projection for Q2.

And somewhat you along those lines, given the upside that you guys had on revenues being so significant, I was a little surprised to see both your own inventory and the channel inventory not drop. Talk about what the dynamic was behind that and what your expectations are for both internal and external inventories and the guidance you gave.

That's not surprising at all because we had a surge in shipments at the end of March. Our turns business within the month in March was the highest, at least I can remember in my memory, almost half of what we booked in March we shipped in March and February was the same. So I think it's purely a timing issue. I don't think it is -- you know, it just so happens that it didn't flow through at the end of the quarter because we shipped so much at the end of the quarter.

And how does that flow through to your own inventory? If you ship that stuff so much turns oriented, why wouldn't that bring your own inventory down?

Oh, that's -- I think we had said in our last conference call that our inventory will be relatively flat this quarter and the reason for that is that we can't turn down our fabs quickly. We have some contractual agreements on -- we have to give them some time. But we did work down some of the products but we also had some new products, specifically LinkSwitch-II, where we have had significant demand so we had to actually build quite a few of those. So we are really not worried about the inventory. I would much rather be prepared for any upturn than try to be very strict on the inventory. But having said that, we should come back to normal inventory turns, I would say by third or fourth quarter of this year.

Thank you.

You're welcome.

We'll go next to Vernon Essi, Needham & Company.

Thank you very much. Nice quarter. Just wondering if you could give us an update on anything out of the Department of Energy, if you heard anything new as to what the plans are in that front?

Vern, it's Joe. I think the short answer is no, we haven't heard anything new. As we've said, the new administration has efficiency as kind of the number one item in their list of priorities for their energy agenda but we haven't seen anything specific to this point in terms of new efforts from them. Of course, the ENERGY STAR program, which is part of the DOE and the EPA, does have a number of standards in development which we've talked about before, in terms of they've got external power supply standards, TV standards in development, lighting standards and some other things.

Also, just on the consumer strength sequentially, wondering if there's any specific end market area that was particularly an outlier in terms of demand?

The strength was really coming from primarily from the appliance market which includes major appliances, white goods as well as air conditioning.

And any specific region? Was that an Asian driven situation or was it just worldwide, from your perspective?

Pretty broad based.

Seems very broad based.

Okay. All right. Thank you.

You're welcome.

(Operator Instructions). We'll go next to Sumit Dhanda, Banc of America.

Yes, hi, good afternoon, guys. Balu, I had a question for you. You noted the fact that part of the reason the channel inventories were up was because the surge in March and probably not sold through. I'm curious as to why that would be the case, given how short your lead times are, given the ready availability why should it pile up in the channel at all?

Well, when we ship it to them, it doesn't get instantly shipped, you know, on the last day of the quarter, whatever inventory they have, they just count inventory. It's hard for me to believe they would actually build inventory at this stage of the game. So, I mean, all I can tell you is what we see and it's not unusual when you ship so much at the end of the quarter for it to go up. I wouldn't be surprised at all if it comes back down in terms of weeks, maybe not in terms of dollars because if the revenue grows, obviously dollars would grow at the end of this quarter, Q2.

The second question I had was on the April order trend where you talked about some moderation. Maybe a couple ways, if you could try to address that. First, is it back down to October levels? Is it a modest drop from obviously very strong levels in February or March? How would you characterize it? And then I remember last quarter on your conference call you had indicated at the time that 65% of your revenues were basically booked, whether it was through turns or backlog. How is that number shaping up at this point in the quarter, this time around?

If I look at the second half of March, where we had had a kind of a burst of demand and orders, I would say that the first three weeks of April is down about 15 to 20% or so, roughly, compared to that. But if I look at the whole quarter of Q1, and I take the average booking per week, we are comparable or very slightly higher and that's why I think that may be more representative of the real demand.

Okay. And then on the other question on, how is it shaking out versus perhaps is this comparable to October levels?

The bookings I would say are comparable, the March and February were comparable to September levels.

Okay. Can I ask just one more? The strength you've talked about in consumer appliances and in industrial seems to run counter to what most other semiconductor companies have suggested. I mean, they highlighted those two areas, especially industrial as an area of significant weakness. Is there anything in particular that's specific to your products that you should be seeing a different trend? Did that segment get depleted more heavily or do you think there's some restocking going on here? What would be your best explanation?

The only thing I would see that is seasonal is the air conditioning. In the past we have found Q1 is the strongest quarter for air conditioning because they're building air conditioners for summer and we are certainly seeing a significant sequential growth in that area. And the major appliances, I don't have any strong explanation for that one. And industrial area, the biggest change we are seeing is in the industrial metering and there is definitely a very strong trend in Europe and in the US to go to electronic metering so that you can read the meters remotely and also charge people differently at different times of the day.

Okay. Thank you very much.

You're welcome.

It appears we have no further questions at this time. I would like to turn it back over to management for any additional or closing remarks.

Okay. Well, I know there's a lot of calls going on this afternoon. So we appreciate everyone listening. The Webcast of the call will be archived on the investor info section of our website, investors. PowerINT.com and thanks for listening.

And this concludes today's conference. We thank you for your participation.