Power Integrations Inc (POWI) 2009 Q2 法說會逐字稿

Good afternoon and welcome to the second quarter 2009 financial results conference call for Power Integrations. Today's call is being recorded. At this time I would like to turn the conference over to Mr. Joe Shiffler. Mr. Shiffler, please go ahead.

Thank you and good afternoon. I'm Joe Shiffler, Director of IR and Corporate Communications for Power Integrations. With me are Balu Balakrishnan, President and CEO of Power Integrations; and Bill Roeschlein, our Chief Financial Officer.

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 expressions that look toward future events or performance. 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 in our statements. Such risks and uncertainties are discussed in today's press release and under the caption "Item 1A, Risk Factors" in part two of our most recent Form 10Q filed with the Securities and Exchange Commission on May 6, 2009.

Lastly, this conference call is the property of Power Integrations, and any recording or rebroadcast of the 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. Power Integrations had an outstanding quarter, highlighted by sequential revenue growth of 22%, $17 million of operating cash flow, and record bookings. Orders increased by 25% from the first quarter and nearly 20% from a year ago, and the trend has continued into the third quarter, making July the highest month of bookings in our history.

Based on these record bookings, we believe we are on track for an excellent third quarter, with revenues between $54 million and $58 million. The mid point of that range would be up 14% sequentially and 4% higher than the third quarter of last year. Even the low end of the range, $54 million, would represent record revenue and the resumption of positive year over year revenue growth one quarter before the anniversary of the last year's downturn.

While factors such as supply chain oscillations and government stimulus efforts may be partly responsible for the strong up turn in our business, we believe that our results also reflect significant market share gains. We believe we are now seeing the benefits of the growth initiatives we have undertaken over the past several years, including the expansion of our sales and FA staff, our investment in software tools and online resources to better serve smaller customers, protection of our intellectual property, focus on emerging opportunities like LED lighting and smart meters, and the [inaudible] launch of our next generation products such as TinySwitch-III, TOPSwitch-XS, and most recently, LinkSwitch-II, which has been one of the most successful product introductions in our history.

In just over a year in the market, LinkSwitch-II has grown to about 10% of our total revenues, and could exceed 15% in the third quarter. In the second quarter alone we won more than 40 designs with LinkSwitch-II, including a high volume design for a Nikon digital camera charger, Seiko Epson projector, several LED lighting and metering designs, and about a dozen cell phone charger designs. LinkSwitch-II offers highly accurate primary site controls and excellent efficiency performance, allowing designers to forego expensive feedback circuitry while meeting even the most stringent efficiency requirements, such as 30 milliwatts of no-load consumption, which is the five star standard for cell phone charger efficiency.

Our ability to help customers meet such tight efficiency specs in a cost effective fashion has become a big differentiator for us in the power supply market, and is perhaps the most significant factor driving the acceleration of our market penetration. We have been a leader in energy efficiency power conversions for more than a decade, since introducing our EcoSmart technology in 1998. At that time efficiency was not yet a critical design criteria for most power supplies. But we anticipated that it would eventually become a significant market driver, and made the investments necessary to be ready when the market moved. These investments include not only products, but also system and circuit level innovations that enable extremely efficient cost effective designs such as the two new circuit designs we introduced earlier this month; a 3 watt power supply using LinkSwitch-XT that consumes less than 10 milliwatts of no load power; and a 15 watt design with TinySwitch-III that consumes less than 30 milliwatts of no load power.

Another circuit design for LED street lights using our HiperPLC product was recently named Green Product of the Week by Green Power Zone, a popular online trade publication. In addition to systems design, we have also made significant investments in information resources for our customers, such as Green Room website, which provides a comprehensive directory of worldwide efficiency standards, as well as tools like our new efficiency compliance calculator, which was recently named the Green Product of the Month by a popular European trade publication.

The comprehensive of products, design support, and customer resources that we provide is the result of the laser like concentration on the power supply market over the past 20 years. This focus has made us the leader in the transition to highly integrated power supplies and we think the growing importance of energy efficiency is an opportunity for us to extend our lead.

Older, less efficient power supply technologies like linear transformers and self oscillating [discrete] designs are disappearing from the market and we believe we are far better positioned to capture this business than larger, less focused competitors, or smaller discrete competitors who lack the resources to build the kind of complete offering that we provide, and therefore compete primarily on the basis of price. While cost will always be king in the power supply market, efficiency adds a new dimension to the game, one that we believe clearly works in our favor. And while efficiency is already a significant market driver, we are still in the early innings of this transition with many more standards and specifications to come in the years ahead.

Europe's ecodesign directive continues to move forward with mandatory standards for external power supplies, simple set top boxes, and also a new mandatory standard for televisions scheduled to take effect in 2010, along with the horizontal standard for standby consumption that covers a wide range of end products, including appliances, consumer electronics, and computer equipment.

Meanwhile the US Department of Energy, at the direction of President Obama, has accelerated its effort to develop efficiency standards for more than two dozen product categories while the [Registar] program has specifications in development for TVs, audio visual equipment an a variety of other product categories.

And as we have mentioned on previous calls, we are seeing more and more interest on the part of OEMs in achieving efficiency levels over and above what is required as the market benefits of being perceived as a green company continues to grow.

The Five Star standard for cell phone chargers is a great example of this trend and we are also seeing interest from some customers in meeting Europe's Tier II standby requirements, which don't take effect until 2013.

So just to wrap up before I turn it over to Bill, we are very pleased with our recent performance and our near-term outlook, and we believe we are well positioned competitively, particularly as the market continues to move towards higher levels of efficiency. We think the future looks even more promising as emerging technologies such as LED lighting continue to develop and we complete the rollout of our first generation of high power products over the next couple of quarters.

We believe the high power market, comprised of power supplies above 50 watts of output, represents a 25% to 30% of our addressable market, and should begin to contribute meaningful revenue in 2010. And now I'll turn it over to Bill for a review of Q2 financials. Bill?

Thanks Balu, and good afternoon. We comfortably exceeded our revenue expectations for the quarter, coming in at $49.3 million, up 22% sequentially and down 8% year over year. Revenues from the consumer end market led the way, with a sequential increase of more than 30%, driven by broad-based strengths in appliances and consumer electronics applications. Industrial revenues increased by more than 20%, also driven by broad-based growth, but highlighted by LED lighting and metering applications.

Communications revenues were up nearly 20% sequentially, driven primarily by cell phone chargers, while revenues from the computer end market increased in the mid teens, reflecting strength in LCD monitors as well as improvement in the desktop PC market. Complete end market and product revenue mix can be found in the financial tables included with our press release.

Turns business accounted for approximately 70% of revenues in the quarter, compared to more than 75% in the prior quarter. Average selling price for the quarter was $0.33, unchanged from the prior quarter, and from the year ago period. The distribution channel accounted for 63% of revenues for the quarter, while 37% came from direct sales. Avnet, our top distributor, was our only 10% customer, accounting for 15% of revenues. Channel inventories declined to 5.4 weeks from 5.7 at the end of the first quarter.

Non-GAAP gross margin was 49.7%, down 270 basis points sequentially, but just above the midpoint of our projected range. As you may recall, about 100 basis points of the sequential decline was the result of a non-recurring inventory benefit that occurred in Q1. The remaining decline was primarily the result of the weaker US dollar versus the Yen, which impacts wafer pricing from our Japanese foundries.

Non-GAAP operating expenses for the first quarter were $16.8 million, up about $1 million sequentially, but still about $1.5 million lower than a year ago. The key driver of the sequential increase was R&D expenses, reflecting deliberate efforts on our part to accelerate new product roll outs, including both next generation products for our core low power markets, as well as additional first generation high power products.

GAAP operating expenses included $2.4 million of stock based compensation, down from $3.8 million in the first quarter, reflecting the option buyback we executed in December, which reduced our option overhang by about 30%. As we mentioned on last quarter's call, we have also shortened the look back period on our employee stock purchase plan from 24 months to 6 months, which further reduces stock based compensation as well as share dilution.

Our non-GAAP and GAAP tax rates for the quarter were 18% and 21% respectively, better than expectations, and reflecting our strong revenue performance, which increased the proportion of our income coming from international markets that are subject to lower rates.

Weighted average share count for the quarter was 28 million, down slightly from last quarter, and down about 15% from a year ago, reflecting the impact of our stock buyback.

Non-GAAP EPS was $0.25 per diluted share, up from $0.14 in the prior quarter. GAAP EPS was $0.16, up from $0.01 in the first quarter.

On the balance sheet, we ended the quarter with $159 million in cash and investments, up $7 million during the quarter, reflecting strong free cash flow of $15.7 million comprised of $17.4 million of cash flow from operations, less $1.7 million of CapEx.

Accounts receivable decreased by $3.8 million with DSO falling from 41 days to 26, while inventories came down by $6.3 million reflecting the stronger than expected sales. Inventory turns stood at 4.5 at the end of the quarter, up from 2.7 last quarter.

Looking at uses of cash, we announced a $25 million buyback repurchase authorization in May, shortly after concluding the second of two consecutive $50 million buybacks. We used $8.9 million during the second quarter repurchasing about 400,000 shares at an average price of $22. Our buyback program is designed to be highly price sensitive, with repurchase activity diminishing significantly as the stock price moves higher, which it has done recently. We also paid a dividend of $0.025 per share during the second quarter, with another $0.025 payout scheduled for September 30.

Turning to the outlook, as Balu mentioned, we are anticipating third quarter revenues between $54 million and $58 million, which would be up roughly 10% to 18% sequentially. This outlook assumes a turns requirement in the mid 50s, compared with 70% in the second quarter and more than 75% in the first quarter. The reduced turns percentage is consistent with the longer lead times we are currently experiencing on many of our products, due to the rapid growth in demand.

Our forecast also reflects a degree of caution about the economic outlook and the possibility that recent order trends may not be sustained throughout the quarter. We expect third quarter gross margin to be similar to second quarter levels, with the benefits of increased production volumes offset by the impact of product mix, particularly the stronger than expected ramp of LinkSwitch-II, which is early in its life cycle, and still relatively high on the cost curve.

As is typical of our newer products, we expect margins on LinkSwitch-II to improve over time, as we move off of supplemental high temperature testing and optimized test times. We also expect to achieve significant reductions in packaging and silicon costs for LinkSwitch-II over the next four quarters. We expect GAAP and non-GAAP operating expenses for the third quarter to be similar to Q2, and we expect our GAAP and non-GAAP tax rates to be in the mid 20s and low 20s respectively. With that I'll turn it back over to Joe.

Thanks, Bill. We'll move to the Q&A session now and since I know there's another call coming up at the top of the hour that many of our listeners may want to join, I'd like to ask everyone to stick to one question and a follow up the first time around so we can get to everybody. And then, we'll be happy to come back around for a second round of questions after that. Operator, would you please give the Q&A instructions?

(OPERATOR INSTRUCTIONS) And we'll go first to Tore Svanberg with Thomas Weisel partners.

Yes, thank you and congratulations on the solid results. First of all, just looking at the guidance, you said you expect turns to be in the mid 50s. I mean, is that basically just because that's all the capacity and inventory that you're able to do? Because, if I remember correctly, I think your turns are usually in the 70s.

You are right. In the past, it has been in the 70s but if you look at Q4, I think we were as low as 52. It's not as much that we are limited on all products. But some of the products we have extended the lead time so six to eight weeks from our normal four week lead time.

So, what we are finding is that people are ordering well ahead of time. That's why our turns will be less. So, as I said, the bookings are still very strong. But they are not necessarily in the quarter. A lot of it is in the next quarter.

Fair enough. And my follow up is you talked about, obviously, your [high] current products starting to ramp in the next couple of quarters. Can you just give us a bit more color there, as far as should we really expect this to become multi-million dollars already this year? Or, are we still going to see the biggest contributions starting in 2010?

I think you will see the multi-million dollar kind of contribution in 2010. You may see a little bit of revenue in the second half but it won't be significant.

Perfect. Great results, thank you.

Thanks, Tore.

And we'll go next to Vernon Essi with Needham and Company.

Thank you very much and yes, echoing the compliment there; very, very good quarter here. I just wanted to touch base. You had a big move in your consumer revenue sequentially. I know you said it was broad based. Are there any programs in particular that stick out for that rise in revenue?

Vern, it's Joe. No, not particularly. It's, as we said, extremely broad based across both the appliance area, major appliances, small appliances and also most of the major consumer electronics categories.

And just refresh me; I know you had said that there was an air conditioner program I think you had won that was pretty big in the Pac Rim. Is that blended into this quarter and next? Or, when is the bulk of that revenue hitting?

The air conditioner business was a contributor to the strength. I'm not sure about the particular program you're referring to but yes, the air conditioning business was part of the strength. We include that in the appliances business.

Okay and then finally, obviously echoing what Tore said here about your visibility, if we look at your backlog, how much of that do you think is shippable in the third quarter, versus out into the fourth quarter? It sounds like you're getting good visibility into Q4. Just an estimate, rough range?

I don't think I have the exact number with me. All I will say is certainly, people are booking further ahead for multiple reasons. One is hourly times have gone [out]. But also, there are shortages in other components, the market place. So people are definitely planning ahead.

Okay. Thank you very much.

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

Hi guys and echoing my congrats too. First and foremost, I guess, if I think about kind of shipping versus consumption, so the inventory dynamic. I know you said the weeks of inventory in the channel came down. Did the dollars come down as well? And what other metrics should we look at to get comfortable about how you're shipping, versus what you believe end demand is?

Well the dollars and inventory rose ever so slightly but the consumption has increased dramatically, in terms of the channel. The inventories on our own balance sheet, not yet shipped, decreased to the $6.3 million that I referred to.

So I guess, if you think about how you're shipping versus consumption, assuming that you started below consumption, any sort of color that you guys can get on whether this is kind of catch up or real demand really pulling it through and therefore the sustainability of it?

Well, when you look at some of our large customers, we are barely able to meet their timing requirements because they were used to four week lead times. Now they're seeing six to eight week lead times.

So, we don't think -- they're not holding these components or they're not trying to build inventory, certainly at the large customers.

As you saw, the distribution inventory went up very slightly, in dollar terms in Q2. And we are assuming that it will go up in dollar terms in Q3, simply because of the growth in revenue. So, they need to keep more inventory, especially when you have longer lead times. They have to carry more inventory. And we have actually included that in our estimate of Q3 revenue.

Okay then the quick follow up question, to keep it short, to keep Joe happy; the fourth quarter, I know you're not guiding for it, but typically, it is down for you guys. If we think of, with your lead times extending and what your backlog is doing, etc., what would be the puts and takes that would make that either be kind of normal seasonality, worse than that or better than that?

I think it has been plus or minus from Q3. If I were to take an average -- mentally, I haven't done the calculation myself. It's essentially flat.

All right. So, as you think about -- I mean, again, given the lead times, the backlog, etc., puts and takes that would make better or worse this time, especially after such a good third quarter?

It's hard to say. I mean, as I said, we are getting longer term bookings. So, I would say that it's hard to say anything other than maybe historically flat.

Okay; thank you.

And we'll go next to Brian Piccioni, with BMO Capital Markets.

Hello. I guess I should add my congratulations as well. I apologize if perhaps you've already addressed some of my questions because the press release only came out a few minutes before the call. So, you might have already commented on them as frantically we're doing our models and that sort of thing.

With respect to end market demand, in terms of the outlook for the third quarter, is the outlook driven by any particular force? Or, is it pretty much broadly based?

It is very, very broadly based. And, as I said earlier, it's not at all clear to us that there is any inventory building up at our customers because, they are really asking us to ship parts as quickly as we can.

But, it's harder to tell whether there is inventory building up at the OEM levels. They ship to the OEMs who then ship the products out.

So, as far as we can tell, it looks like the demand, because we only measure it on a POS basis. We measure revenue on a sell through basis to the distributor.

Right. And you mentioned a bit earlier, with respect to a particular question, that some of your customers seem to be experiencing component shortages, if I understood correctly; not with your stuff but with other peoples' stuff.

In times of abrupt increases in demand, there's always the possibility of double ordering and this sort of thing. Do you get any sense that there's a risk, currently, that some of your customers are double ordering from you?

Well, since our part is in a proprietary product, it's probably not accurate to call it double ordering. But there's probably some over ordering in my mind because, when they can't predict their requirements two, three months down the road, which they usually are not able to do that, the tendency will be to order more than necessary. Because, it's just easier to deal with it that way.

So, we believe that it's some amount of over ordering for future months. And we have taken that into account in our guidance for Q3.

Thank you.

And we'll go next to Steve Smigie with Raymond James.

Great, thanks guys; congratulations. You were up 20% sequentially, I think, on the industrial side. Industrial's a category that's out there. It's been generally pretty weak, I think. Is that specifically because you're focusing on LED stuff and metering that's growing? Or is it capturing share? Just help me understand how you did so well in such a tough category.

You're absolutely right. It is the LED lighting and the metering category where we believe we're growing share significantly. And of course, the LED market is also growing on its own.

Right, right; exactly. That's what I was trying to get. I guess people talk generally, about, like, factory automation and stuff like that. I guess it's less of an issue for you guys.

And then, on the high power stuff, what's the opportunity to expand to new customers over time?

Pretty much all of our high power business will be new opportunity, not necessarily new customers. Because many of the customers might be the same. But as far as [revenue] growth the [goal], it's all incremental because we don't have any revenue in high power to speak of, right now.

Right but I mean of the wins you have now, you have certain customers, obviously. And that sounds like it's going to ramp pretty strong in 2010.

I guess my question is, in addition to those customers, are there other ones that you think you can get? Or are you pretty much at the customers' now; it's just a question of that product ramping?

No, no. We expect to get a lot of new customers. We are working with a lot of customers. The designs we have gotten so far are relatively low volume designs at the Tier 2 customers. We are working with Tier 1 customers to get into some major programs. But that is dependent on the windows on those programs.

But, we feel optimistic that next year there would be meaningful revenue from the products.

Great; thank you very much.

(OPERATOR INSTRUCTIONS) And we'll go next to Sumit Dhanda with Bank of America Securities.

Yes hi. Balu or Bill, the first question I had was, I think last quarter, last couple of quarters, you've indicated how much of the business you've already booked at the time you reported. Could you share that metric with us again, as it relates to the September quarter?

Yes. At this point, we are somewhere in the 75% to 80% booked for the quarter.

Okay, great. The other question I had was on the revenue line. I mean, the performance is impressive here. You are in the third quarter and you're poised to exceed your prior year in revenue just set a few quarters ago. I mean, any quantification you've done internally to try to delineate how much of this is really specific to you, in terms of being driven by design wins? Because, no other semiconductor company is really close to exceeding their prior peak year by the September quarter.

So, just trying to, you know, get some more detail around what, in particular, is helping you out so significantly here.

Yes, we have spent a lot of time on that. It is very clear to us that we are gaining significant market share from our competitors. Plus, the energy efficiency requirement from standards and OEMs is really helping us to get designed in a lot of different products, very quickly.

If you remember our previous discussions on this subject, the power supplies don't get redesigned very often. But with the energy efficiency requirements, most people are now forced to redesign their power supplies, which gives us more opportunities.

But more importantly, I think we are gaining significant share from pretty much across all markets, from all competitors.

Last question from me, on the gross margins; you know, you noted that LinkSwitch-II is a little bit of a drag here. You said a few quarters before it improves so, as we think about modeling out gross margin, should we just think about it as oscillating around the current level until those benefits from the efforts you have in place kick in here, on LinkSwitch-II?

Our goal is to get those margins on LinkSwitch-II corrected as quickly possible. What we didn't expect is the level of demand. The demand is so high right now, our first priority is to supply parts.

And when you are doing that, it's harder to make the tweaks to the part, to make the manufacturing of those products very efficient, in terms of test times and also in terms of the silicon die size and many other areas like packaging and so on.

So, it's just a question of mechanics. And in terms of margins, going forward, we want to get back to above 50 margins as quickly as possible; with the only caveat that supplying customers is a higher priority than that.

Okay; thank you.

You're welcome.

(OPERATOR INSTRUCTIONS) And we'll go next to Christopher Langiaru with Sidoti and Company.

Hey guys, nice quarter.

Thanks there, Christopher.

So, my question has to do with visibility. It sounds to me, with the orders extending -- you know, it's always been tough on you guys with visibility. How much of an improvement have you seen in visibility? And how, you know, how much visibility do you have at this point?

Well, the visibility has improved in the sense that we are getting orders ahead of time.

Okay.

That doesn't necessarily mean our customers know what they need, three, four months down the road. It's just that they are forced to order ahead of time because of our lead times.

Okay.

Our lead times have doubled, essentially, on many of our products. And so, I wouldn't take that as an improvement in visibility. It's just that they are placing orders earlier. And that's why I mentioned earlier that we think there's a certain amount of overbooking in our orders. And we are making some adjustments to that to the best we can in our guidance.

Got you; okay. Thank you guys.

You're welcome.

And with no further questions in the queue, I would like to turn the conference back over to Mr. Shiffler for any additional or closing remarks.

Okay, thank you. That concludes the call this afternoon. The web cast of the call will be archived on the investor info section of our web site, which is investors.powerint.com. Thanks for listening and good afternoon.

And once again, that does conclude today's conference. We thank you for your participation.