Power Integrations Inc (POWI) 2011 Q1 法說會逐字稿

Good day ladies and gentlemen, and welcome to the Power Integrations first-quarter 2011 financial results conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. (Operator Instructions)

As a reminder, this conference call is being recorded. Now, I will turn it over to Joe Shiffler, Director of Investor Relations. Please begin, sir.

Good afternoon, and thanks for joining us to discuss Power Integrations' financial results for the first-quarter of 2011. With me on the call are Balu Balakrishnan, President and CEO of Power Integrations, and Sandeep Nayyar, our Chief Financial Officer.

During today's call, we will refer to financial measures not calculated according to Generally Accepted Accounting Principles. Please refer to today's press release, available on our website 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 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, goal, anticipate, 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 2 of our most recent Form 10-K, filed with the Securities and Exchange Commission on February 25, 2011. This conference call is the property of Power Integrations, and any recording or re-broadcast 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 recorded revenues of $76.8 million in the first quarter, up 5% versus the prior quarter, with all four major end-markets contributing to the increase. We also saw a sequential increase in bookings for the second quarter in a row. And orders remained healthy through the month of April, providing further evidence that the [economic correction] that began last summer may now be behind us. Meanwhile, metrics like channel inventories and backlog coverage are continuing to move closer to historical norms, suggesting that business conditions may finally be normalizing after two years of volatility stemming from the 2008 financial crisis. To be sure, the tragic events in Japan have brought a level of uncertainty to the entire electronics industry.

Japan is of particular concern to Power Integrations because we source the majority of our wafers from Japanese foundries. So, I would like to spend a moment reviewing the impact that we have seen thus far. We have two Japanese foundry partners, Oki Semiconductor and Seiko Epson, as well as one European partner, X-Fab, which is located in Germany. Our wafers are manufactured in a total of three facilities in Japan, two of which are located in the southern island of Kyushu. These two facilities, which account for a substantial majority of our Japanese supply base, were not directly impacted by the earthquake and have not experienced any interruptions. The third facility, an Epson fab located in Yamagata Prefecture, was not physically damaged, but has been inoperative since the earthquake due to the ongoing shortage of electricity.

Despite the continuing outage, our ability to supply customers has not been impacted, and we believe that our operational safeguards will enable us to continue meeting customer demand. All products manufactured in the disabled fab are dual-sourced, and we have sufficient capacity at our other foundries to compensate for the loss, even in the unlikely event that the Epson fab remains down for an extended period of time. Also, it is a standard operating procedure for us to keep a healthy inventory buffer on hand to provide a cushion against any short-term disruptions. And we were fortunate to have an even larger-than-normal level of inventories at the time of the disaster.

We continue to monitor the supply of raw materials into our foundries and assembly houses. And at this time, we are not aware of any shortages or other issues that would prevent us from meeting customer demand.

While we feel reasonably comfortable with the supply side of the equation, the demand side is somewhat less clear. Japanese customers account for 6% of our total sales, and we expect Japan sales to decrease in the second quarter as a result of the disaster. We anticipate that there also may also be some effect on overall demand if the manufacturing of power supplies or end products is impacted by shortages of other components or materials.

On the other hand, our ability to supply customers without interruption throughout the crisis appears to be benefiting us to some extent, as we know of at least one situation where we have gained share from a competitor that was unable to supply sufficient parts following the earthquake.

While it's difficult to know how these factors will impact our results over the next quarter or two, we believe the underlying trends in our business remains healthy. Design activity continues to be very robust, driven by energy efficiency, reliability and traction with our new products, particularly in the LED lighting and high-power markets. We shipped our first high-volume orders for the high-power market in the first quarter, including our Hiper product line, as well as our energy-saving CAPZero products and our new high-voltage diodes, which came from our acquisition of Qspeed at the end of 2010. We expect high-power sales to ramp up gradually throughout the year, resulting in full-year revenues of roughly $5 million to $8 million from the high-power market.

Order flow remains healthy as well, and we began the quarter with slightly higher backlog than the prior quarter. Based on this backlog, plus a solid month of orders in April and taking into account some of the uncertainties stemming from the Japan situation, we estimate that our second-quarter revenues will be between $76 million and $82 million.

Before I turn it over to Sandeep, I will spend a moment on gross margin, which has been impacted by a number of factors in recent quarters, including the rise in gold prices and more importantly, the depreciation of the dollar versus the Japanese yen, which increases the cost of wafers from our Japanese foundries.

The dollar is down more than 30% versus the yen over the past four years, and more than 10% since mid- 2010. As expected, last year's move had a significant impact on our first-quarter gross margin, as the high-cost wafers began to flow through our inventory.

Our non-GAAP gross margin came in at 48% for the quarter, a decrease of 180 basis points sequentially, driven primarily by the yen. As we discussed on the last quarter's call, we have a number of efforts underway to reverse the pressure on our gross margin, and these efforts are on track. The ramp-up of our new lower-cost process technology is well underway, with a small number of products currently shipping and more to come as the year progresses.

We are also in the process of converting from gold to copper wire in our packaging, and we expect to begin shipping small quantities of products with copper in the second quarter, with additional products to be converted over the next several quarters. We also expect the last of our 5-inch wafer fabs to be shut down by the end of this year as we complete the transition to lower-cost 6-inch facilities. We expect to see significant uplift to our gross margin beginning in the fourth quarter, and we remain committed to our goal of getting back to the 50% level by the end of this year. Longer-term, we are also taking steps to reduce the sensitivity of our gross margins to the dollar/yen exchange rate beginning with a new dollar-based foundry partnership that should start ramping later this year.

With that, I'll turn the call over to Sandeep.

Thanks Balu, and good afternoon. Our first-quarter revenues were $76.8 million, up 7% year over year, and 5% sequentially. All four end-market categories grew sequentially, led by the Industrial segment, with growth of just over 10%, followed by the Computer and Consumer markets, with mid-single-digit growth, and Communication, with low single-digit growth. Two distributors were our only 10% customers during the quarter, comprising 19% and 12% of sales, respectively. Overall, distributors accounted for 68% of revenues, while direct sales comprised 32%. Channel inventory stood at 5.8 weeks at quarter end, down almost a full week from 6.7 weeks at the end of the prior quarter. Average selling price for the quarter was $0.29, unchanged from the prior quarter.

As Balu indicated, non-GAAP gross margin was 48%, down 180 basis points sequentially, driven mainly by the decline in the dollar versus the yen. GAAP gross margin was 47.4%, including the impact of stock -based compensation as well as acquisition-related amortization. Non-GAAP operating expenses were $22.5 million, up about $300,000 sequentially, reflecting the resumption of FICA tax payments as well as the impact of Qspeed acquisition, which included a small number of permanent headcount additions plus some transition expenses. Those increases were partially offset by lower sales and marketing expenses, which were higher than normal in the prior quarter, reflecting the product launches and sales and customer training we did in Q4.

GAAP operating expenses for the quarter were $24.7 million, down about $400,000 sequentially, reflecting lower stock-based compensation expenses. Our non-GAAP and GAAP tax rates for the quarter were 18% and 19% respectively. Coming down to the bottom line, non-GAAP net income was $0.40 per diluted share, up $0.01 from the fourth quarter, while GAAP earnings were $0.33 per diluted share, up from $0.30 in the prior quarter.

Turning to the balance sheet, cash and investments totaled $207 million at quarter end, a decrease of about $8 million during the quarter. Uses of cash included the payment of $6.9 million for the Qspeed acquisition, as well as $5.5 million to fund the leased facility as part of the SemiSouth transaction announced in October. We also paid out $1.4 million in dividends during the quarter.

As expected, inventory remains steady in terms of dollars, increasing by about $900,000 sequentially. On a day's basis inventories declined by about 10 days, to 143 days. We expect inventories to decrease both in terms of days and dollars in the second quarter, and we continue to expect that the inventories will return to historically normal levels sometime in the second half of the year.

Turning to the second-quarter outlook, we expect revenues to be in the range of $76 million to $82 million. We expect our non-GAAP gross margin to be flat, plus or minus half a point compared with the first-quarter. And as Balu indicated, we expect to be back to the 50% level by year-end as our cost reductions begin to impact our results in a meaningful way in the fourth quarter. We expect non-GAAP operating expenses for the second quarter to be similar to the first level of $22.5 million. Stock-based compensation plus acquisition-related amortization should total roughly $3 million, bringing GAAP expenses to approximately $25.5 million. We expect our non-GAAP tax rate for the second quarter to remain at about 18%, while our GAAP tax rate should be around 20%.

With that, I will turn it back over to Joe.

Thanks, Sandeep. We are ready to open up for questions. Operator, if you would give the Q&A instructions, please.

(Operator Instructions) Our first question is from Ross Seymore of Deutsche Bank.

A question on gross margin first. Given what the dollar/yen has done, what's the puts and takes that allows you to still to be flat in the second quarter?

Basically, as we said, the amount of the yen impact that we have -- and we also had, as we talked about -- the cost reductions that are starting with the new process technology, which are starting in the second quarter, which offset a bit the additional impact that we will be getting slightly from the yen.

Do you expect the move from your second-quarter guidance to how you hope to exit the year to be somewhat linear? Or, is there something that really pops in, in the fourth quarter that makes a stair step up?

There's a little bit more stair step up for the fourth, considering all the cost-reduction activities, which is the transition to the new process technology, the transition to copper starting to come about a little bit. All these are all coming together. And that is why we mentioned we will have more of a meaningful impact in terms of the inventory flowing through in the fourth quarter.

The last question. The LinkSwitch 2 lead times. Have those returned to normal, or do they remain extended?

The lead times for most of our products now, including Link 2, are in the 4-to-6-weeks range now.

Thank you. Our next question is from Tore Svanberg of Stifel Nicolaus.

A few questions. First of all, your high-power contribution from the year of $5 million to $8 million seems a little bit higher than what I had expected. Anything going on there as far as maybe some acceleration in revenue? Is maybe CAPZero starting to ramp faster?

Yes, The CAPZero is doing extremely well. It is ramping very rapidly and on top of that, we also have Qspeed which is the acquisition we did in December, which goes with our Hiper products into power-[factor correction] status. If you remember, we had 2 tier 1 PC power supply Companies designed in with our Hiper product. And they started production this quarter. We had roughly $1 million worth of revenue in high-power this quarter, and by the end of this year we expect to be in the $5 million to $8 million range, including the CAPZero and Qspeed.

Very good. I think on LED last year, you did about $14 million, and you've been almost doubling that revenue every year. Do you have a forecast for that contribution in 2011?

We are certainly seeing a slowdown in certain parts of the LED business, specifically in the replacement bulbs. It looks like inventory has built up in the retail level that have not sold through because of high prices. And I think Cree also mentioned about this in their conference call. Our revenue in Q1 was flat with Q4. Given that situation, it is unlikely, I believe, that we will double again this year.

You mentioned you're qualifying another foundry, [at least] a dollar-denominated foundry. Is this a US foundry, or is this going to be in Asia as well? Just so we know the geographic location.

This is also in Japan. But it is far away from other foundries. So, geographically within Japan, it is separated reasonably well.

Very good. Last quarter, I think your bookings were up 20% sequentially following obviously a tough bookings environment in Q4. How about bookings in Q1? Were they up as much, or slightly lower?

Bookings were up nicely during the quarter. I would say in terms of a book-to-bill, we were roughly around the [1%] for the quarter.

Then the last question. Your guidance range is wide, obviously reflecting the uncertainty in Japan. But if we look at the midpoint, what type of turns requirement would you need to get to the midpoint?

Typically, turns don't really turn to revenue with the [DSTY] inventory challenge, but roughly, if you take it (inaudible; audio skips) in the [mid- 20s] I would say.

Great. I actually did have 1 last question. Your channel inventory was 5.8 weeks. Is that [so we're] now down to historical levels? Or, is there still a little bit of work down left there do you think?

Our lead times are in the 4 to 6 weeks for pretty much all of our products now. So, the DSTY inventory should be in that range, 4 to 6 weeks. I think it has gotten already into that range. It may fluctuate a little bit, but it's already below 6 weeks, so we are comfortable with that.

Our next question is from Vernon Essi of Needham & Co.

I was just wondering, if we look at your guidance into the quarter, and any color you could give us on your end-markets and where you see more activity relative to others. That would be appreciated.

We haven't seen a significant difference. We had a slightly stronger Industrial revenue in Q1, but the rest of the markets were all up. In terms of Q2,, we don't have any input as to any one market being stronger than the other.

Okay. You had made some comments, of course, obviously, about Japan and the impact there. Do you see, when you're talking to customers -- there was the fear from our side of things that people were building inventory buffers ahead of consumption. When you say things look to be going through a demand issue, do you think it's related to that? Or, do you feel this is more just in general, like you had mentioned power supplies and what have you aren't being built as quickly and whatnot. If you could dive into that a little bit more, I would appreciate it.

In terms of demand in Japan for our products, we are aware that we will have less shipments [for] Japan in Q2 than in Q1. That's because some of the customers are directly impacted by the earthquake. As far as the end-demand impact across the world, it's much harder to predict. We are concerned that some customers of ours may not get other components to build the power supply, or their customer may not be able to build the end-product, which might have an impact on the demand for our products. So, that's extremely difficult to figure out, but we have certainly taken a little bit of caution in terms of our guidance in Q2.

And then finally, in the past you have talked about your cost implications on the back end. I'm just wondering, if you make this migration from gold to copper, if there is any cost that you have with your [OSAT] partners and how that might play out in your cost model?

I'm not sure I understand the question. If we make the change from gold to copper, that will reduce our packaging cost. But you are referring to some of our partners.

I understand that. But the question is, you don't have the situations where you're doing any consignment equipment purchases for your partners on that end or anything along those lines.

No.

So, your CapEx would be relatively stable through that transition.

Correct.

Thank you. Our next question is from Andrew Huang of Stern, Agee.

First, on the Industrial, on my model it looks like Industrial is up, I think,11% sequential. So, I am pretty sure that you include LED lighting in that segment. If LED was flat sequential, can you give us a sense of what was up so much?

Really, just about everything else. It was pretty broad-based strength, industrial controls. Metering was up. It's a very fragmented market, as you know. More or less across-the-board, it was reasonably strong.

Okay. If you wouldn't mind giving a little more color on your high-power business. You had, I believe you said, 2 primary PC power supply designs shipping in the March quarter. Is that correct?

That is correct.

Are you going to have any [TV] business in calendar 2011?

We are planning a TV chip set. Actually, the TV we use the power factor correction chip that we already have, but it will also have another chip companionship that will do a power conversion with a resonant mode controller. And that product is being sampled right now. There is an evaluation going on at several TV customers, but we are not yet close to a design win. We plan to introduce that product in the next few months.

Okay, and then just 1 last question. I think, if I'm not mistaken, Q3 tends to be historically your seasonally strongest quarter. With the Japan earthquake, will that chang, you think this year?

We don't know exactly how much the growth will be, but I have no reason to believe that Q3 will not be at least seasonally -- a growth over Q2. I believe Q3 will grow. We'll have growth rate in Q3 relative to Q2.

Our next question is from Steve Smigie from Raymond James & Associates.

This is Andrew [Goldman] for Steve. I was hoping you could talk about any recent developments with regards to energy efficiency standards? Are you seeing any new opportunities to take some share?

This is Joe. There are a number of things going on in the energy efficiency front. Nothing we would probably consider a blockbuster new standard, if you will. But the general trend continues to go in the right direction. Europe's standards on external power supplies kicked into the tier 2 of the standard last month, so those external power supply standards have now tightened. There are a number of different computer standards under development in various parts of the world, including India and China, I believe. So, there are a lot of things going on in energy efficiency front that we think will help us over the next several years.

Thank you. On your litigation expense, it looks like it was down a little bit here in the first quarter. Any idea how that kind of tracks during 2011?

I think the best way that what we have talked about it, plus or minus, it runs at about $1.5 million, so $6 million for the year is the way to look at it. And the best way to model it is $1.5 million, plus or minus.

They still vary from quarter to quarter. It is very difficult to predict exactly what will be in the quarter. But, for the entire year, roughly about $6 million and, without knowing exactly what the quarter numbers would be, I would just roughly divide it equally into 4 quarters. .

Our next question is from Sumit Dhanda of Citadel Securities.

A couple of questions. Balu, in terms of the $5 million to $8 million in revenues that you are expecting from the high-power business, what kind of visibility do you have into that? Are these designs that you're pretty sure will ramp through the course of the year and you have a good sense of how to quantify the benefit?

Yes, we have forecasts from the 2 major customers. We also have the sales forecast on CAPZero and the Qspeed diodes. Obviously, things don't always go with forecasts, but we are reasonably confident we will be in that range.

Okay. On the big bump you are expecting in gross margin, especially in 4Q, you mentioned a lot of moving parts. Is there a way you can quantify the impact of each moving part? Or, can you give us a sense of what that gross margin number might look like in Q4?

I would say the silicon cost is the biggest impact. The copper will be a smaller impact.

Do you think in total this is helping you by a point, 2 points, the 2 factors together?

Sumit, I think what we was said is we will get back to the 50% level by the fourth quarter.

One last question I had was, last conference call, I think when Cree had talked about some softness, you didn't think it would spill over to your business. Do you get the sense that the softness you have seen has stabilized within the LED lighting business? Or, do you think we should look to Cree for signs of whether that's going to occur going forward?

It's hard to say exactly where the placement [ball mark] will go. But, the commercial part of the business is doing extremely well. In fact, we had about 100 design wins in Q1 in LED. So, the fundamentals are very good. I think there is just a pause in the replacement lighting market. They were probably more optimistic that they can sell to the consumers than it turned out to be. The return on investment is extremely compelling in the commercial market, whether it is office lighting or street lighting or exit light and so on and so forth. So, our enthusiasm for this market hasn't changed. It just looks like on the consumer side of it, it is going slower than people anticipated.

Our next question is from Christopher Longiaru of Sidoti & Company.

Most of my questions have been answered. The 1 that I do have, is you talked about your guidance and how Japan is affecting it. Could you be a little more specific into what areas you're seeing a little bit of pressure in there, and maybe quantify how much that is affecting your guidance?

As far as the overall demand across the world, it is more of a judgment than any specific fact. We haven't seen anything that we can point to and say, the demand has gone down because they couldn't build enough smart phones or pads and so on and so forth. Because that information doesn't come back to us. We are so far down the chain. But, what we do know, is that some of the orders from Japan have declined. So, there is a small decline in the Japanese customer demand for our products. That 1 we can quantify. We do have a good idea of what it would be in Q2.

That's included in your guidance?

Yes.

Can you quantify that? Is that $3 million? Is that $10 million?

Chris, Japan is only about 6% of our revenue. We are expecting that to be sequentially down in Q2. It's hard to know exactly how much. It's potentially, I guess shaving maybe a point or 2 off of our sequential revenue expectations.

We have a follow-up from Tore Svanberg of Stifel Nicolaus.

Yes, I had a few follow-ups. First of all, of you talked about gaining share from somebody due to shortages. I assume that's from a [discrete] vendor. Can you let us know if that share gain is from Japan or from a US vendor?

It is from actually an integrated solution offered by a Japanese competitor. It is actually a hybrid.

When we look at these types of share gains, does this now mean since they have gone with your solution that we should assume that business to be sticky Or, would they go back to the other supplier once they have enough supply?

We are trying to hard to make sure it is sticky, how about that? We are looking to the customer to emphasize the fact that we are much more broad-based, and therefore they should continue to use us.

Okay, sounds good. I think you said you expect 20% turns to get to the midpoint, and your lead times are 4 weeks to 6 weeks. So, wouldn't you already be at the low end of the range right now?

At this point you mean?

Correct.

The only thing I would warn is that what we ship in is all we know, and we don't know how much gets shipped out. That's why we don't actually talk about what we have booked to date. But, the assumption is roughly correct.

We've just now gotten to the point on LinkSwitch 2 where we are able to quote 4-to-6 week lead times. We've really just gotten to that very recently

Great. Just a last 1 for Sandeep. What was the operating cash flow in the quarter please?

The operating cash flow was about $5 million, I think, for the quarter. It was about $5.6 million.

(Operator Instructions) We have a follow-up from Andrew Huang of Stern, Agee.

On the litigation expense, can you remind us who your litigation [is with] today? What's outstanding?

That's a good question. The only litigation we have is with Fairchild, but we have multiple cases going on. One is the continuation of our lawsuit that we just recently won, because there are additional products that they are continuing to infringe, we believe. The second one is the continuation of the original SG lawsuit, which is in California. And then in addition to that, we have the Fairchild lawsuit in China.

Okay, got it. The second question is, I think a few weeks ago you put out a press release about a new driver that eliminates the electrolytic capacitors. And I think typically, that tends to be the weakest link in the driver circuitry. My question is, first, do any of your competitors have that kind of a product? And then, 2, are you getting any traction with that?

That's a good question. I [can] say with 100% certainty, at least the existing competitors don't have products that can eliminate the electrolytic capacitor. The reason I'm not 100% sure about other products is there are products being introduced on a regular basis. But as far as I know, the ones that are in the market do not have that ability. Again, to clarify, this is not a new product, this was actually a reference design. The product was actually introduced in June of last year. That product is already capable of eliminating electrolytic capacitors, but the references [that are being introduced,] not only should demonstrate you can't eliminate the electrolytic capacitor, but also demonstrates a 90% efficiency, which is actually quite an amazing achievement for a very cost-effective driver.

I'm showing no further questions at this time. I'd like to turn the call over to Mr. Joe Shiffler for any closing remarks.

We will wrap it up there. Thanks, everyone, for listening. There will be a replay of this call available on our website at investors.powerint.com. Thanks, everyone, for listening, and good afternoon.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may now disconnect. Have a wonderful day.