Power Integrations Inc (POWI) 2011 Q4 法說會逐字稿

Good day, ladies and gentleman, and welcome to the Power Integration's fourth-quarter 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. I would now like to introduce your host for today's conference, Joe Shiffler, Director of Investor Relations.

Good afternoon and thanks for joining us to discuss Power Integrations' financial results for the fourth 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, potential, schedule, 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-Q filed with the Securities and Exchange Commission on November 7, 2011. This conference call is the property Power Integrations and any recording or rebroadcast of this conference call is expressly prohibited without the written consent of Power Integrations. And now I'll turn the call over to Balu.

Thanks, Joe, and good afternoon, everyone. Our fourth-quarter results reflect the difficult business conditions felt across the semicon industry in recent months, with revenues down 11% compared to the third quarter. However, after an extended period of soft bookings throughout the summer and into the fall, we saw a meaningful uptick in orders around the middle of the fourth quarter, resulting in a book-to-bill ratio of approximately one for the fourth quarter. While it is difficult to predict the trajectory of the recovery, it appears that the business conditions have stabilized and perhaps begun to improve.

Based on these trends, we currently expect first quarter revenues of between $64 million and $70 million, a slight increase at the midpoint, compared to the fourth quarter. Despite challenging business conditions, we generated record operating cash flow in 2011, and we are well-positioned to grow our top and bottom lines as cyclical headwinds abate, thanks to the progress we made last year winning designs, ramping new products, growing our customer base, and reducing our manufacturing costs. We also strengthened our position as a leading enabler of energy-efficient electronics and lighting, two of the most secular growth opportunities for the analog semiconductor industry.

Last month the California Energy Commission enacted mandatory efficiency standards for battery charges like those used in power tools, electric toothbrushes, hair trimmers, uninterruptable power supplies, and even electric golf carts. More than 170 million battery chargers are currently in service in the State of California alone, and the CEC estimates that the new standards will eventually save enough energy to power about 350,000 homes. Effective February 2013, new devices will be required to meet the standards, which regulate both charging efficiency and power consumption during maintenance mode when the battery is fully charged. These standards apply to many power supplies not covered by the CEC's landmark 2007 standards for external power supplies, and therefore have the potential to cause another wave of redesign activity in the power supply market.

While standards like these continue to be a major factor in the power supply industry, market forces have an equally important role to play in driving energy efficiency. Manufacturers have recognized that consumers are increasingly concerned about the energy consumption in products they buy, and many have responded by designing their products to be far more efficient than the mandatory standards or even voluntary specs like ENERGY STAR. Over the past two years, we have rolled out a range of products called the Zero series aimed at helping manufacturers minimize standby waves, and in some cases achieve the ultimate goal of zero-standby, an idea of a very powerful appeal to certain consumers. Our customers have shown a great deal of interest in the zero-standby concept, and that interest is now translating into design activity.

Our LinkZero chips have been designed into certain models by one of the world's largest TV manufacturers, and also by a top 10 appliance manufacturer for a zero-standby washing machine scheduled for production in 2013. Another top tier appliance manufacturer has designed in a three-chip combination of our TinySwitch, CapZero, and SENZero ICs, demonstrating not only the strength of our product offerings for ultra-low standby, but also the highest silicon content now available to us in higher-power applications like appliances, PCs, and TVs. We expect both of these themes to be very important for us in the years ahead.

Overall, we saw double-digit growth in design wins in 2011, and we sold products to nearly 11,000 end customers during the year, 10% more than the prior year and twice the number we sold just four years ago. This demonstrates not only the growth in our business, but also a continued success in the effort we began many years ago to diversify our revenue base and increase our presence in more fragmented markets like consumer appliances, LED lighting, and industrial applications. These revenue streams are stickier and more stable than other markets and they are markets with benefits of integration such as reliability, ease of design, and energy efficiency are most highly valued. They are also markets that require an extensive global sales and support infrastructure and a strong track record of quality, areas where we have an advantage over many of our smaller competitors. More than half of our revenue in 2011 came from high-reliability applications like appliances, industrial applications, LED lighting, desktop PCs, and servers.

Meanwhile, revenues from more volatile cell phone charger markets accounted for less than 20% of our sales last year, the smallest percentage in our history, in spite of the fact that we remain the market leader in cell phone charger IC, with over $55 million in sales. We expect to remain a leader in cell phone chargers and other high-volume markets in the years ahead, even as our revenue mix becomes further diversified into industrial applications, TVs, appliances, LED lighting, and other high-reliability applications. I believe we are unmatched in our ability to compete across the full range of power supply applications, with strong market share in both high-volume customer markets and the more fragmented high-reliability markets. The common denominator is integration, which brings reliability, efficiency, and ease of design without increasing system costs. Another unique advantage we possess is our leading-edge high-voltage technology, which enables our highly-reliable integrated MOSFET to compete head-to-head with the cheaper, less robust bipolar transistors specified by discrete competitors for many high-volume applications.

Another area where we made good progress in 2011 was in reducing our manufacturing costs. Throughout last year, we talked about the efforts we have underway to help offset gross margin pressure from higher input costs, particularly from high wafer costs due to the unfavorable dollar-to-yen exchange rate, as well as the higher price of gold. Our cost reduction efforts are beginning to pay off, starting with a sequential increase of 60 basis points in our fourth quarter gross margin, and we believe further improvement is likely in the first quarter in spite of lower production volumes.

While the trend beyond Q1 depends somewhat on factors outside our control, we do believe our full-year gross margins will be up compared to 2011, and that we will exit the year with a gross margin significantly higher than what we reported for the fourth quarter of 2011. In closing, while 2011 was a challenging year in many ways, we believe we executed well on things within our control. We are encouraged by the continued momentum of energy efficiency trends, both in electronics and in lightening, and we think we are well-positioned for 2012 and beyond. With that, I'll turn the call over to Sandeep for a review of the financials.

Thanks, Balu, and good afternoon. I will briefly review the details of the fourth-quarter results and the first-quarter outlook and then we will move to Q&A. Revenues for the fourth quarter were $66.7 million, down 11% sequentially and slightly above the midpoint of our projections. The industrial market was the greatest source of weakness with revenues declining approximate 20% sequentially. Consumer revenues were down a little more than 10%, with softness in both appliance and consumer electronic applications. Communication revenues decreased mid-single digits with weakness in networking applications more than offsetting a sequential increase in revenues from cell phone chargers. Computer revenues, which are driven mainly by the desktop market, were also down mid single digits sequentially. Distributors accounted for 73% of sales during the quarter, while direct customer made up 27%. Average selling price for the quarter was $0.28, unchanged from the prior quarter.

Gross margins increased sequentially with GAAP and non-GAAP gross margin each rising 60 basis points to 47.3% and 47.8%, respectively. That is a bit less than the 100-basis-point improvement we had expected, reflecting the end market mix, particularly the relative strength of cell phone chargers, one of the few applications to show sequential growth during the quarter. Setting aside mix, our cost reduction efforts are on track and are now beginning to offset some of the recent margin pressures from the dollar-yen exchange rate and higher gold prices. GAAP operating expenses were $23.8 million, down approximately $700,000 sequentially. Non-GAAP operating expenses, which exclude stock-based compensation, as well as amortization of acquisition-related intangibles, were $21.5 million, down about $1.5 million from the prior quarter, as a result of the expense control measures we implemented during the quarter in response to the weak demand environment. Our GAAP and not GAAP tax rates for the quarter were 23% and 22%, respectively.

Average diluted share count for the quarter was 29.2 million shares, down about 700,000 from the prior quarter, reflecting repurchase activity over the past two quarters. We bought back about 400,000 shares during the fourth quarter for approximately $14 million. During 2011, we bought back a total of 1.5 million shares at an average price of $32 and change. Earnings were $0.22 per diluted share for the quarter on a GAAP basis, while non-GAAP EPS was $0.29.

Turning to the balance sheet, cash and investments totaled $213 million a quarter-end, down about $10 million from the prior quarter. We utilized a total of $15.6 million for stock buybacks and dividends during the quarter, plus $7 million for capital expenditures. These uses of cash were partially offset by cash flow from operations of $9.2 million. For the full year, cash flow from operations totaled $69.2 million, an increase of 50% versus the prior year, and an all-time record for the Company. Internal inventories at quarter-end were $52 million, essentially flat from the prior quarter. With a lower revenue number, days of inventory on hand increased to 135 days, up from 118 last quarter. Inventories in the distribution channel declined for the fifth straight quarter to 4.4 weeks, down from 5.2 weeks at the end of the prior quarter. This is the lowest level of channel inventory in nearly 4 years.

Turning to the outlook, as Balu mentioned, we expect revenues to be between $64 million and $70 million in the first quarter, or a slight sequential increase at the midpoint. Because we use sell-through revenue recognition, revenues and shipments can differ significantly, which makes backlog coverage and turns requirements vary in exact metrics. However, if the assumed revenues will equal shipment, we will need turns business of roughly 40% from the beginning of the quarter to achieve the midpoint of the range. We expect our gross margins to be flat to up 50 basis points sequentially in the first quarter as we see further impact from our cost reduction initiatives offsetting the impact of the lower production levels we have been running in response to the weaker demand environment. Naturally demand trends and other factors like the dollar-yen exchange rate will have an impact on our margin trends throughout the rest of the year. But as Balu mentioned, our general expectation is that we will exit the year at a significantly higher gross margin than we had in Q4 of 2011.

Operating expenses will increase in the first quarter due to the resumption of FICA taxes, as well as the one-time nature of some of our Q4 expense reductions, including a shutdown at the end of December. Specifically, we expect GAAP operating expenses to be between $25 million and $26 million, excluding roughly $3 million of stock-based compensation expenses and a small amount of acquisition-related amortization. Non-GAAP expenses would be in the range of $22 million to $23 million, up about $1 million at the midpoint. Lastly, I expect the first quarter tax rate to be between 21% and 22% on a GAAP basis, and 18% to 19% on a non-GAAP basis, which is my expectation for the full year as well. With that, I will turn it back over to Joe.

Thanks, Sandeep. We will move to the Q&A session now, and, in the interest of time I would like to ask that everyone stick to limit of two questions at a time, and we will be happy to come back around for a second round of questions at the end, time permitting. Operator, would you please give the instructions for the Q&A session?

(Operator Instructions) Vernon Essi, with Needham & Co.

I was wondering if you could just dive in a little bit into your guide, and specifically if I look at your turns component and look over the past couple of years, it is definitely going up as percent. It seems like on a sequential basis your backlog is sort of flattish, and I'm wondering what gives you the confidence that things are turning? Obviously things are very lean out there, but do you have specific indications from some end markets that things are going to improve as the quarter progresses? Any color you could give us would be appreciated.

The biggest indication is that our bookings increased significantly in November, and have stayed relatively flat except for this holidays that cause a little bit of apparition in December and January. The other indication is that we had significant turns business in January, and that bodes well for the quarter. But having said that, we had 1 to 1 book-to-bill ratio in Q4, which indicates that it is stable, not necessarily an upturn yet. So we're still waiting to see whether there will be an upturn in the near future. It's sounds like they're at the bottom and just about to climb gradually up.

Well, on a relative basis, your guidance is strong relative to your peers, so obviously hats off to you on that front. And my follow-up question, just in your prepared comments you made an interesting point about closing this three-chip solution with an appliance manufacturer. I was wondering if you could discuss how that sales process works and how that would differ from things in the past? In the past I got the impression at times you were more of a catalog part to a certain extent, this seems to be more of a direct-sell approach. Is there any changes going on behind the scenes that would facilitate more action like this, and is this going to be a more commonplace scenario to have this cross-sell across the different products?

I think the biggest difference is that in the high-power applications, we have multiple chips that can go into each power supply. In the past, we used to sell only a standby power supply because that is all we could address, either an appliance or a TV or a PC, for that matter, any high-power application. Now we can not only sell into that standby socket, we can also sell into the main power supply, which in itself could be two separate chips, one for PFC and one for the main converter, but in addition to that, we can sell a CAPZero, we can sell a SENZero, and also a Qspeed dial. So we have many different pieces of silicon that we can sell, which significantly increases our ASP in this market. But as far as the selling process itself, it is not that different. Even in an appliance, when we are selling standby, we do have to get involved with the design, even though in many cases the logistics will be done through distribution.

Okay, so just to ask the obvious question, you are seeing the PI brand show its effectiveness in cross-selling these other products without incremental investment in the OpEx line?

Yes, because once we get design into a major manufacturer, whether it is an appliance, or a PC or TV manufacturer, the other people feel a lot more comfortable that it is a product that is endorsed already, and so the design cycle is much shorter. Plus we also learn, over time, the various applications, so we are able to guide the customer to the optimum solution quickly.

And another detail on this, is it possible, and maybe you don't have go into this on this call, but to somehow provide the investment community with maybe a tracking number as to how this dollar content may improve over time? And percentage of maybe multi-cells that you have, or multi-chips within your overall customer base? Obviously it is just starting out, but I would tend to think this might track pretty quickly over time.

Well certainly the dollar content on the high-power is significant a higher for two reasons. One is we have different multi-chip solutions, but also as the power increases, you have more silicon in the power conversion devices. We have a lot bigger silicon and therefore you have higher silicon content. So in the high-power application, the content can be 5 or 10 times more than just a standby chip.

That is helpful, thanks a lot.

Tore Svanberg, Stifel Nicholas.

First question, coming back to turns. I think you mentioned 40% at the beginning of the quarter. You are now a month in, so can you give us a rough idea of where you stand right now?

I prefer not to, and the reason for that is that it can be very misleading. We have done that once in the past and it was very misleading. The reason for that is exactly what we explained, is that what we ship and what gets shipped out are two separate things. Is a very inexact measure in the first place.

That is fair. And you talked about gross margins exiting the year quite a bit higher than current levels. I'm just trying to understand the trajectory of the improvement. Should we expect 50 basis points a quarter in the first half, and then second half, it accelerates? Just help us understand that trajectory please.

Tore, it will be a gradual increase in what our expectation is if all the external conditions remain within our expectations and there is nothing unusual there, that for the year we should probably end up at the 50% level. In the fourth quarter of 2012 we should end up, for the fourth quarter at about 50%.

Very good. Just one last question, can you talk a little bit about your LED lighting business? How big it was last year and what your expectations are for 2012?

Last year we came pretty close to what we expected, a little bit under the number we were thinking of. We were thinking about $20 million, we came a little bit under that. But 2012, it is a little early to say. Maybe as we go through the first and second quarter, we will get a better feel for how fast the market is growing and we can give you a better idea. But all indications are that the design activities are very, very strong, so I expect it to grow very nicely. I just don't know the exact number yet.

That's fair, thank you very much.

Steve Smigie, Raymond James.

I was hoping you could talk a little bit about the operating expenses? You mentioned there's some extra FICA costs, et cetera, in the March quarter. As I look out to subsequent quarters, would I expect to see a pretty meaningful drop in the operating expense as a percentage of revenue and dollar-wise, does it maybe bump down even in June because you do not have the FICA costs anymore?

I think the best way to look at it is we will probably average out somewhere around $23 million a quarter, on an average for the year. That is the best way to look at that.

That seems a little high relative to if I look at a more normal year, it is a good year, but fiscal 2010, calendar year 2010. Do you think your operating expenses on pretty decent revenue were somewhat lower than it seems like they're going to end up based on your guidance here? Has something changed?

No, if you look at the year prior to this, we ended up somewhere on a non-GAAP basis around $89 million for the year. So it seems to be in the range, if you look at raises and stuff like that for the year. In fact, we have reduced discretionary expenses, otherwise it would go up more. So year over year, it is only very incremental, very small increase from $89 million to the low 90s.

Okay. And my next question is, what is the high-power business, I'm sorry if I missed this, but what's is high-power percentage of revenue for 2011? And what do you think it will be for 2012?

For 2011, we had projected $5 million to $8 million. We came within that range. We came on the lower half of that range because of the softness at the end of the year. But we are doing very well in terms of the design activity, and we expect it to continue to grow very nicely this year.

How much of LED overlaps into high-power? Or are they totally separate categories?

There is a little bit of an overlap because the street lighting really falls into high-power. It is typically between 50 watts and 150 watts and some applications goes up to 180 watts for street lighting. But I would say of most of the LED volume is well below that power level. Typically I would say the peak of the volume is around 10 watts. And the range for light replacements is anywhere from a couple of watts to maybe 15 watts, 20 watts. Only the street lights are in the high-power area.

Great, thanks a lot.

Ross Seymore, Deutsche Bank.

This is Mike Chu for Ross. I just wanted to get your thoughts about the relative strength of your end markets in Q1. And also if you could comment on the growth rates you think, just from a relative point of view, those end markets for the year.

For Q1, it is really hard for us to project because until the end of the quarter, we do not get the POS information for the whole quarter to determine approximately where our chips went through distribution. You have to remember, 73% of our revenue last quarter was from distribution. So almost 75% of our revenues is from distribution, and the same chip that can go into an appliance can go into LED lighting solution or into a cell phone, so it is hard for us to tell what application it goes into. We have to wait to see what the mix would be. We are assuming the mix is going to be very similar to Q4 for financial calculations.

Fair enough. And maybe if you could comment on which end markets you think will be faster growing for you for the year? Just your thoughts on that.

Certainly the high-power and LED markets will be faster growing markets. LED market because the market inherently is fast-growing. The PC market is not a fast growing market, in fact it is somewhat of a declining market, however, we are penetrating the market with new products, and therefore we can grow very nicely for many years to come as we grow into that market. The TV market is both growing and we are penetrating into that market. So high-powered is all incremental revenue because of the new products we introduced in 2010 and 2011. So those are the two fastest growing markets, I would say.

Fair enough. Maybe one quick follow-up. You indicated that the cell phone charging business is now only 20% roughly of the of your total revenues. Is that a segment? How should we think about that segment as far as the overall growth with total revenues? Is that going to grow at the same rate and stay at 20%? Or is it going to grow at a faster or slower rate and maybe become a smaller or larger percentage of your total revenues going forward?

The cell phone market itself is relatively stable, it is somewhat saturated at this point, although it seems to be growing a little bit every year. We have, from everything we can tell, the largest share of that market. And our strategy in this market is to sell the product to whoever is willing to pay for the value we bring into this marketplace. There are certain customers who will be willing to purchase a very low-quality product from, for example, a Chinese manufacturer, which is not an apples-apples-comparison, and if we feel that is not a good comparison, we walk away from that business because we can. We do not have any intentions to get out of the cell phone business. We think it is a very good business to have even though it is lower margin, but we pick and choose what business we want. Historically, I should say over the last few years, our share as a percentage, it has ranged 20% plus or minus a few percentage points, and I would say in the long-term, as a percentage, it is likely to decline because the other areas will continue to grow. But as far as our share in the market, even though it will fluctuate a lot because it is just a very volatile market, is likely to stay relatively flat, maybe it will grow a little bit, it depends upon which businesses we decide to take.

That is helpful, thank you.

(Operator Instructions) Tore Svanberg, Stifel Nicolaus.

Just a question on gross margin again. Could you give us a sense of how much of your wafer cost is still subject to the yen-dollar exchange rate? Because I know that you have started to do some more contracts in US dollars, so I just wanted to get a rough idea of the percentage.

It is still a substantial percent of our business, however the mix is changing as we speak. So in terms of the impact of the exchange rate, it used to be just a little while ago, about a 150-basis-point impact for every 10% change in yen. Now I think it is more like roughly 100 basis points for a 10-yen change. Now I think it's more like 100 basis points for a 10% change. For a 10% change in yen, we expect an impact of roughly 100 basis points to the gross margin.

That is helpful. Your inventory days obviously came up because of lower revenues. As we look at the March quarter, should we expect inventory days to come down? Sounds like you're probably going to run utilization a little bit lower?

The way to look at it, as we said, our model is between 110 plus or minus 15, so think we're going to be in the same range. You have to remember we're at the bottom of the cycle, so it is not unusual for the number of days to be higher. If the business was stable, we will be within the range, but now that we are at the bottom of the cycle, we are very comfortable with that inventory we have. In fact we think we need to keep this inventory to be ready to grow when the market comes back. If you cut it back too much then we would have the same problem we had in 2008 where we had a hard time ramping up production.

You mentioned [this] inventory is now down to 4.4 weeks and you said that is the lowest level in four years. Could you remind us what happened the last time it got this low? Did business snap back very quickly or was it gradual? Just help us understand some comparisons.

I think the big difference is that two, three years ago, most of our products had a lead time of four weeks and our distributors generally kept somewhere between 4 to 4.5 weeks of inventory so that they can effectively serve the customers. But now our lead times vary between four and six weeks depending on the product, mainly because we have a lot more products, so we cannot keep inventory of all products at the highest level. So my expectation would be that the distributors will be somewhere in that range, four weeks to six weeks. They're a little bit on the lower end of the range, but it is not really out of range. It could easily be five weeks would be my expectation for a steady-state scenario.

Thank you very much.

At this time I'm showing no further questions. I would like to turn it over to our speakers for any closing remarks.

Since there are no more questions, we will end the call there. Thanks, everyone, for listening. There will be a replay of this call available on our website, which is investors.powerINT.com. Thanks, everyone, for listening and good afternoon.

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program, you may all disconnect. Everyone have a great day.