Power Integrations Inc (POWI) 2010 Q3 法說會逐字稿

Good day ladies and gentlemen and welcome to the Power Integrations third quarter 2010 financial results conference call. At this time all participants are in a listen-only mode. (Operator Instructions). At this point I would like to turn the conference over to your host, Mr. Joe Shiffler is Director of Investor Relations. Sir, you may begin.

Thank you. Good afternoon and thanks for joining us to discuss Power Integration's quarterly financial results. With me on the call today is Balu Balakrishnan, President and CEO of Power Integrations, and Sandeep Nayyar, our Chief Financial Officer. During today's call we will make reference to financial measures that are not calculated according to Generally Accepted Accounting Principals. Please refer to today's press release which is available on our website which at investors.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 forecasts 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 towards 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 risk 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 1-A risk factors, and part two of our recent 10-Q filed with the SEC on August 6th, 2010.

This conference call is the property of Power Integration. And any recording or rebroadcast is expressly prohibited without the written permission of Power Integrations. With that I will turn the call over to Balu.

Thanks Joe and good afternoon. Our third quarter results were strong relative to the revised outlook we provided in mid-September. Revenues came in near the high end of our revised range at $75.5 million, up 26% year-over-year. Our gross margin was 51.7% about the midpoint of the original forecast while operatingexpenses came in at the lower end of the range. Non-GAAP earnings were $0.53 per share up 47% from a year ago.

Like many of our peers we have seen demand moderate as the supply chain digests and apparent inventory overshoot likely caused by some combination of weaker than expected end demand and over ordering in response to extended lead times. We expect revenues to decrease sequentially in the fourth quarter to a range of $67 million to $73 million. The midpoint of this range would bring us to 38% revenue growth for the full year. While cyclical fluctuations are part of life in semiconductor business, we remain focused on building our business for long term growth, and capitalizing on the secular growth opportunities in the high-voltage power conversion market.

When energy efficiency first became a meaningful driver in the power supply market about three years ago, we were well prepared and our growth rate has accelerated as a result. We were equally well prepared when LED lighting emerged as a new application for high-voltage power conversion, and we have captured a healthy share of that market. And as the demands of the power supply market had changed rapidly over the past couple of years in response to tighter efficiency specs, and the unique requirements of the lighting market, Power Integrations has responded with the unprecedented number of new products to help our customers meet these demands without adding cost and complexity.

In August, we introduced SENzero, a new family of ICs designed to eliminate losses from the sense resistors in the main power supply, when products such as TV or a PC is idle and the standby power is engaged. By disconnecting the sense resistors from the high voltages rails during standby operation, SENzero effectively disconnects the main power supply, eliminating a significant source of waste that can jeopardize compliance with the tight standards, such as Europe's Eco Designed Directive on standby waste. SENzero follows in the footsteps of CAPzero introduced in April, which provides a cost-effective way to the eliminate losses from bleed resistors used to discharge EMI filter capacitors in certain high powered applications.

And earlier this month we introduced the latest member of our zero series called LINKzero-AX. Our original LINKSwitch drove a stake through the heart of energy vampires by offering the first cost effective replacement for linear transformers. Now LINKzero-AX puts a nail in the coffin targeting the vampires still hiding inside appliances, TVs, and other products that employ always on auxiliary power supplies. LINKzero-AX features an innovative power down mode that turns off the auxiliary power supply when the end product is idle, completely shutting down the switched mode operation, and internal control circuits and eliminating energy wasted by these unnecessary functions.

When used in conjunction with CAPzero and SENzero, LINKzero-AX enables end products to achieve a total standby power measurement of 0.001 watts. We know of no other electronics solution that can achieve this level of energy efficiency, and we think our customers will be very excited about this. LINKzero-AX is our sixth product launch of the year, compared with our historical average of only one or two per year. You may recall that last quarter we introduce LINKSwitch-PH and LINKSwitch-PL bringing in an unparalleled level of reliability, efficiency, and functionality to the LED lighting market. And at the next month's electronics show in Germany, we plan to unveil two new members of our HIPER family of high powered products, reaching our goal of eight new products this year. We expect each of these new products to begin contributing significant revenues in 2011.

On the strategic front, last week we announced a $30 million partnership with SemiSouth Laboratories, a manufacturer of high voltage silicon carbide power devices based in Starkville, Mississippi. We think that silicon carbide is an extremely compelling technology for the power conversion market, with characteristics that make it far superior to silicon for use in very high powered applications where ruggedness and ultra high efficiency are critical.

SemiSouth has made impressive breakthroughs in silicon carbide technology, and currently offers the world's only commercially available silicon carbide transistor which it is already shipping to several of the top manufacturers of the solar inverters. SemiSouth's technology is applicable for wind inverters, hybrid/electric vehicles, servers, and other applications, ranging up to 100 kilowatts today, and eventually up to 1 megawatt. Our partnership with SemiSouth entitles an equity investment in the company,the purchase of an exclusive license to their technology, and additional financial commitments to assist them in expanding their operations, including the sale of their [art] fabrication facility.

We were honored that Mississippi Governor Haley Barbour and a number of other dignitaries, joined us last week for the announcement in Starkville reflecting the importance of this investment to Mississippi's emerging high-tech sector. SemiSouth is an ideal strategic fit for Power Integrations, and a great example of our selective disciplined approach to strategic transactions. It is consistent with our focus on high voltage power conversion markets, where our strong property portfolio and deep understanding of the market gives us significant competitive advantages.

It strongly supports our efforts to expand our high powered applications, and it builds on our leadership in energy efficiency and our status as an enabler of clean technologies, adding solar, wind, electric vehicles to our existing presence in plain text applications, like energy lighting and smart meters. We are extremely excited about working with the SemiSouth, and we look forward to telling you more about it in the years ahead.

And with that, I will turn the call over to Sandeep.

Thanks Balu, and good afternoon. I will quickly review the Q3 results which I think are very straightforward, and then spend a moment discussing the outlook. Third quarter revenues were $75.5 million, down about 6% on a sequential basis.

However as you may recall from last quarter's announcement, our sales in Europe were artificially high in Q2, as a consequence of transferring some of our European distribution business over to Avnet from several smaller distributors. While it is difficult to measure precisely, we believe this caused about $2 million of sales to be pulled into the second quarter from the third quarter. This timing effect had about a 5 point impact on our sequential growth rate for the third quarter accounting for most of the sequential decline. In terms of end markets the sequential decline was driven by consumer and computer markets, each of which saw revenues decline by just over 10% sequentially. Industrial revenues increased by a low-single digit percentage, while communications revenues were flat sequentially.

On a year-over-year basis, revenues were up 26% led by the industrial market, with better than 60% growth and the consumer market with grow of 27%. Revenue mix for quarter was 37% consumer, 30% communication, 22% industrial, and 11% computer. In terms of sales channels, sales through the distribution channel accounted for 67% of revenue in the quarter, while direct sales comprised 33%. Two distributors Avnet and ATM were our only 10% customers during the quarter, comprising 18% and 11% of sales respectively.

Gross margin for the third quarter was above the midpoint of our projected range at 51.7% on a GAAP basis a decline of just 30 basis points from the prior quarter. On a non-GAAP basis excluding stock based compensation gross margin was 51.9% also down 30 basis points sequentially.

Operating expenses on a GAAP basis were $23.8 million, just below the midpoint of our forecasted range. Excluding stock based compensation expenses of $2.8 million, non-GAAP operating expenses were $21 million, up about $600,000 from the prior quarter. The increase was primarily in the R&D line reflecting the impact of a small R&D acquisition that we completed during the quarter.

Sales and marketing expenses were essentially flat while G&A increased slightly reflecting higher patent litigation expenses. Non-GAAP net income was $15.5 million, or $0.53 per diluted share. Earnings on a GAAP basis were $0.43 per diluted share.

Turning to the balance sheet, cash and investments increased $4.5 million to $224.1 million. Significant uses of cash during the quarter included the aforementioned acquisition, which had a purchase price of about $12 million, about $9 million of which was paid within the quarter. Inventories increased by $13.4million during the quarter, reflecting weaker than expected demand, as well as new product builds. We exited the quarter with 121 days of inventory essentially consistent with our targeted range of 90 to 120 days.

CapEx totaled $8.3 million for the quarter, mainly for capacity additions but also including $1.5 million for construction of a solar powered installation which was completed in August. We also paid a quarterly dividend of $0.05 per share, or a total of $1.4million. These uses of cash were partially offset by lower Accounts Receivable, as DSOs reached an abnormally low of 10 days reflecting strong collection, but also the timing of shipment in settlements with distributors which is a temporary phenomena that should normalize in subsequent quarters.

Turning to the third quarter outlook, as Balu explained, we expect revenues to be between $67 million and $73 million, or a sequential decline of roughly 3% to 11%. We expect our gross margin to be between 49% and 50% for the fourth quarter, down a little more than 2 points at the midpoint. The expected decrease is being driven by several factors most notably end market mix.

We expect a higher percentage of sales to come from the cell phone market in Q4 reflecting the relative strength of that market compared with the higher margin consumer and computer markets, where the current slowdown in Japan appears to be concentrated. Also impacting our gross margin in Q4 are a variety of factors that are putting upward pressure on our unit costs including the continuing rise in the price of gold which impacts our assembly costs, and the ongoing strength of yen versus the US dollar which impacts the cost of wafers from our Japanese foundry partners.

Lastly, although we outsource our manufacturing, we do own some of our equipment at our foundries and back end suppliers, and we have added a significant amount of capacity this year, which results in higher depreciation. We expect GAAP operating expenses to be between $24 million and $25 million in the fourth quarter, including stock based compensation expense of about $3 million. That implies non-GAAP OpEx of $21 million to $22 million compared with the $21 million we reported in the third quarter. Any increases will be primarily in the sales and marketing line reflecting the timing of our worldwide sales conference in December,a series of seminars we are conducting for the LED lighting customers, and expenses to support new product roll-outs including those mentioned by Balu in his remarks.

I expect the R&D and G&A lines to be fairly flat compared with the third quarter. Lastly, we expect our GAAP tax rate for the fourth quarter to be around 20%, while our non-GAAP tax rate to be around 18%. With that I will turn it back over to Joe.

Thanks Sandeep. We are ready to open it up for questions. In the interest of time I would like to ask each caller to adhere to a limit of one question and a follow-up, and then time permitting we would be happy to come back around for second round of questions, if you have further questions. Operator would you please give instructions for the Q&A.

Absolutely. (Operator Instructions). Our first question comes from Alex Gauna, your line is open.

Thanks very much for taking my question. I was wondering if I can challenge you to look out a little bit into 2011 and let us know,given some of the inventory work down I would assume you see the channel doing, what you might think about seasonality in Q1, maybe the push and takes from inventory work down versus normal seasonality? Thank you.

Hi Alex, this is Balu. I have talked to a number of customers I was in Asia a few weeks ago, and it is hard for us to tell what is going on but our customers feel that Q4 this is likely to the low point in terms of demand. They expect Q1 to start moving up. So that is the best information I have at this point.

Are there any areas in particular where you would be more or less optimistic in terms of moving into 2011?

That is a hard one. Certainly from a seasonality point of view, usually Q1 is strong in the industrial area, which is good in many ways for us.

Okay, thank you. I will go back into the queue.

Thank you. Our next question comes from Vernon Essi. Your line is open.

Thanks for taking my question. I wanted to just, if you could discuss the inventory growth in-depth, and also you obviously have this interesting currency timing. My second question. How would that play out over the next couple of quarters?Is this a phase shift in terms of that cost, and if you could walk us through that?

The reason for the inventory growth that we had talked about in the last quarter was the new product introductions. We expect a lot of the inventory to grow, and we wanted to have more inventory added to which a little bit is also an impact of the demand. In terms of the yen timing as with the inventory levels we saw a slight, we are expecting a slight impact in Q4, but I think we will see a more significant impact of the yen in Q1.

To be clear here, we would be expect further gross margin headwind in the first quarter over the fourth quarter.

That is correct. And the reason for that is, with the inventory level we have right now, it takes about five to six months for the exchange rate variations to impact our gross margin, so the impact in Q4 is relatively small, in Q1 we expect it to be much more significant, because if you noticed what has happened to yen, it dropped from somewhere around 94 in May, down to about 81 over the last three or four months. And so that is definitely going to have an impact in Q1.

Okay. Thank you very much.

Thank you. Our next question comes from Tore Svanberg. Your line is now open.

Yes, hi. This is Evan Wang calling in for Tore. I was wondering, you mentioned that the inventories were due to, there were two factors I was wondering if you can give a quick breakdown of those?

The inventory increase, it is equal between the new products and demand. We are coming up with a lot of new products, and we also wanted to build up, but I think the increase is more about producing equally between the two.

And can you make any comment on how soon you believe this inventory could return to a more normal level?

Actually our inventory is not out of our range. We really need somewhere in the 90 to 120 days of inventory, and we are at about the 120 days, and we may actually go a little bit higher because of the new products, but it is not out of the ordinary at all for us. That is what enables us to keep our lead times low.

And if I may squeeze in one last question, could you comment about the current status of your LinkSwitch-II product. Is it still supply constraint, or how is supply and demand balanced for this product at this point?

I think, as I mentioned on the last call, we are still in constrained, and we expect to be constrained until the end of this year. So approximately the end of the year, we expect to be caught up on the demand.

Okay, thank you very much.

You are welcome.

Thank you. (Operator Instructions). Our next question comes from Steve Smigie. Your line is open.

Great, thank you. I was wondering if you could talk a little bit about turns over the past few quarters. So turns in the June quarter, turns September, obviously there were some unusual impacts there from the distributors, and then turns again in December. Because, what you are assuming there, and really the June to December is what I am interested in because it seems like September is sort of an unusual quarter there?

Yes, Steve, it is Joe. The turns as a percentage of sales have really been running in the 10% to 20% range for the last several quarters. That was the case. The range we told you last quarter that we needed to meet the midpoint of the guidance I think was 15% to 20% obviously having revised the guidance down,we didn't quite get to that level. I think we are looking for about 10% to 15% turns here for the fourth quarter.

Okay. And you guys have had longer lead times than normal. You just mentioned that, two, you will catch up with that in Q4 and build an inventory to help some of that situation. How are you able to build the inventory if there were constraints, if it is not just in LinkSwitch-II, and also what is going to reverse the lead time situation?

Actually, we have not had constraints in the overall capacity. The constraint we have had is in the capacity to produce LinkSwitch-II. We have had a capacity more than demand even through the peak times so we were able to build some inventory. So at the moment, pretty much everything other than LinkSwitch-II is in the four to six weekly time. And LinkSwitch-II at the moment is still at 12 weeks.

Okay. And how much of the inventory that you have now is for new product ramps that you guys are working on as a significant percentage at this point? Because this products are still pretty new that is still an insignificant dollar amount?

I think in a dollar amount it is not a very significant number but we will be building some additional inventory between now and the first quarter,of the new products.

Okay.

We have sufficient inventory of the old products.

Alright, thanks. I will jump back in to queue.

Thank you. Our next question comes from Ross Seymore.

Balu, you talked a little bit about what you thought your customers would do in revenue, and if the fourth quarter was going to be the trough. I know you recognized revenue on sell through, but is it as simple as you are saying that the fourth quarter should be your trough in revenues too, or is there an inventory adjustment that we need to consider?

If the customers start ordering more in Q1 that would be our bottom also, the Q4. So if the customers are right about what they are saying, then Q4 would be the low point for revenue.

Great. Then just a couple quick clarifications on the income statement. On the gross margin guide, is that proforma or GAAP, and the litigation expense,what do you think we should model for that, both in the fourth quarter and in 2011?Thank you.

For the litigation expenses, as we said earlier it is roughly about $1.5 million give or take, and the 49 to 50 is the GAAP.

So it is about 0.5 point adjustment to get proforma?

About 0.2. Yes, about 0.2 difference between GAAP and non-GAAP.

0.2. Okay, thank you.

You are welcome.

Thank you. Our next question comes from Arnab Chanda, your line is open.

Thank you. Just a couple of questions. First of all, Sandeep, if you could talk a little bit about a couple of different items that effect your gross margin. Kind of quantify that a little bit. Mix versus what the end dollar has done and where that take you. Obviously it's hard to predict currencies, but if you could talk about that a little bit?And the question for Balu, two questions, one is can you talk a little bit about silicon carbide, are you going to actually buy wafers, or are you going to co-design, or when we will receive revenues from there?Do you think lead times adjust down to the LinkSwitch-II from 12 to 4 right away in Q4, or can you already see that happening and the push outs have already happened so that shouldn't have further impact?Thank you.

Okay, let me take the questions from the bottom up. So in terms of the LinkSwitch-II, we should be caught up with the demand approximately at the end of the year but as far as building sufficient inventory to bring the lead times down. It will take us probably through Q1. Maybe February or March Q1 is when we last have sufficient inventory to bring in the lead time on LinkSwitch-II.

Then the question on silicon carbide we have exclusive license to this technology. We don't normally discuss what our new product plans are. But it is suffice to say that we would obviously be doing it for it for a reason. So we plan to use the technology in some fashion. But you shouldn't be expecting revenue from it for the next two years, if that helps you in that regard.

And let me have Sandeep answer the gross margin question.

On the gross margin for the current quarter. I will give you talk in terms of general first where you talked about the currency. As Balu indicated, that depending on the inventory levels that we have, it could take five to six months for the yen to have an impact. That is why we indicated it would be more so in the Q1 versus the Q4. In Q4 the mix factor probably gives you roughly, this is all approximate, about half of the impact is going to come from that, and the other half approximately would come from the factors, like the yen, the depreciation, and the goal that we talked about in our release. Hopefully that helps.

Yes. Thank you very much.

Thank you. Our next question in queue is from Christopher Longiaru. Your line is open.

My question has mostly to do with there is a lot of going on in terms of different standards and laws coming out starting in 2011. I wanted to see if you will see any impact or any change in this the design actively recently from customers, and how that is progressing for you going forward and the long term outlook that you have based on those regulations?

This is Balu. Yes, we are seeing a lot of activityrelated to the standards. Probably the two biggest ones. The first one is the ECO directive, ECO design directive in Europe that requires a broad range of products to have less than 0.5 watt standby, and that is forcing a lot of redesign in TVs, PCs, and many appliances. That is where the CAPzero SENzero and the LinkZero are targeted towards.

The second area is the TV standards that have been established by the California Energy Commission, and also much more recently by the Chinese government. This is on the actual efficiency during normal operation, and they have set very strict limits on how much power the TV can consume under normal operation, and that is again forcing people to redesign the TV. Not only the power supply, but the rest of the TV also to better power management, but certainly on the power supply side,the focus is to get as high efficiency normal operation as possible. For that we have a new product that just started sampling, it has not been launched yet, which will provide extremely high efficiency for TV and PC applications.

And so, in terms of your revenue, how does that play out in terms of adding to your revenue?

I see the impact of the ECO design directive in 2011, and we will see the impact of the TV standards in 2012.

Great, thank you very much.

You are welcome.

Thank you. Our next question comes from Ray Rund. Your line is open.

Thank you. I have two questions. The first one has to do with your receivables dropped quite a bit. Is that indicative that most of your shipments were done early in the quarter?

So that is part of the thing that the shipments, it is not that it was done in the early of the quarter but it was shipment into the channel was a little lower in the last month compared to the previous quarters, and added to that the ship and debit timing is that we sell to them at the gross and then we give discounts to certain volume customers, and the distributors can claim that only after they have realized the sale so there is a timing issue. We collect our receivables but we discount a little later, so the timing of that also offsets it.

I see. My second question has to do with the projected gross margin in the next quarter is the lowest that you have--, if it comes in at that level, it is the lowest that you will have seen in more than a year. Do you think that is a transitory phenomenon, or do you think that the gross margins that you will be able to command are heading downwards again?

In the near term the headwinds are stronger than the tailwinds. The headwinds being the yen exchange rate, the gold price, and a production related increase in costs, because we will start slowing down our production, because we think we have enough inventory of most of the products. Still we need some more inventory of new products and LinkSwitch-II.

So all three of them will have a headwind impact and in fact will be moreso in Q1 than in Q4. On the tailwind side, we continue to do cost reductions. We have already started a small portion of our products to be manufactured in the new technology and that will continue to gradually increase all of way through the next year.

The second benefit is that if the mix goes in our favor, normally in Q1 the mix is a little bit better, because the industry is stronger, whereas in Q4 it appears that the cell phone is stronger than communications and computer, which the cell phone has the lowest gross margin. So the net/net of all of that is that Q1 will be lower margin than Q4, and again in the short-term, there is the strength of the yen, and the price of the gold is really impacting us.

I see, so it may take a while before you get back to 50%?Or above 50%?

That is correct.

Okay. Thank you.

Thank you. (Operator Instructions). Our next question is a follow-up from Steve Smigie. Your line is open.

Great, thanks. I am not sure if I'm understanding the operating expense guidance. If I just look at it, excluding the impact of the options so backing out options expense, it looks like it sort of flattish up a little bit even from Q3, despite a pretty meaningful drop there in revenue, and how much of that is just maybe extra litigation versus,help me understand why there is an increase there, and OpEx despite the drop in revenue?

The increase in OpEx is really related to the sales conference that they will have in December which we traditionally have in the fourth quarter. We are also holding some seminars for our LED customers, and that is what is really driving the growth of expenses but otherwise pretty flat from the current quarter.

Okay, I guess you mentioned that earlier. But I was hoping you can talk any impact from the acquisition you did during the quarter, any revenue or the financial impact, the $12 million acquisition you mentioned?

There is no revenue as we have talked about from that acquisition. That was a strategic long term acquisition for us, so we won't have any short-term revenues from that acquisition.

It is an early stage the R&D company, and we acquired it for the technology and the people. So that won't have any revenue impact for several years to come.

Okay, could you also give an update on the LED lighting solutions, you came out with a dimmable product not so long ago. Could you talk about how that is looking out there, will you be putting out any other products along those lines, and how is the growth, or the market looking out right now? For the general lighting?

The feedback we have received on those two products have been extremely positive. In fact we have several designs already in production and we have started shipping those products even though the revenue in Q4 will be negligible, but we expect material revenue from those products contributing to LED revenue in the next year.

So this year's LED revenue is all on our standard products. Next year is the first year we will see revenue from products that are specifically designed for LED, and it has all of the designable features that customers have asked for, which is dimming, PFC, and also ability to remove components in the design that reduces, that limit the lifetime of the power supply.

Okay, and the last question, is on the dimming, do you see the majority of the market or a significant part of the market headed towards the dimmable solutions?

It is hard to tell. I think that right now there is a combination. Certainly, the lower cost end of it is not dimming. It is non-dimmable but there are a number of customers who are going towards the dimming side, but it is hard to tell what percentage will actually have the dimming feature.

Okay. Great. Thanks a lot.

You are welcome.

Thank you. I show one more question in queue. Ross your line is now open.

Just one quick follow-up. The Mississippi investment that you made is that $30 million we should take out of cash in 4Q?

Not all of it will come because a portion of it we already had advanced in the last quarter. A portion of it, as you know we said is for line of credit so it will depend on when they draw down that line of credit, which is about $10 million roughly. So that could depend. I would say about $10 million to $15 million would get impacted in the coming quarter.

Perfect. Thank you.

Thank you. At this time I would like to return the program to our presenters for any closing remarks.

Thanks everyone for listening. That will conclude the call today. We will have an audio replay on our website shortly. The website is investors.powerint.com. Thanks everyone for listening.

Ladies and gentlemen, thank you for your participation on today's conference. This does conclude the program, and you may now disconnect.