Power Integrations Inc (POWI) 2013 Q1 法說會逐字稿

Good day, and welcome to the Power Integrations' first quarter 2013 earnings conference call. All participants will be in listen-only mode.

(Operator Instructions)

After today's presentation, there will be an opportunity to ask questions.

(Operator Instructions)

Please note, this event is being recorded. I will now like to turn the conference over to Mr. Joe Shiffler, Director of Investor Relations. Mr. Shiffler, the floor is your's, sir.

Thank you very much. Good afternoon, and thanks everyone for joining us to discuss Power Integrations' financial results for the first quarter of 2013. 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, 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 SEC on February 22, 2013.

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

Thanks Joe, and good afternoon. Our first quarter revenues were within our predicted range, albeit towards the lower end, due in large part to a drop of almost 20% in sales for computer end market, reflecting the well-documented softness in the -- in that industry. Communications revenues fell by about 10% sequentially, as seasonal patterns were exasperated by a sharp decrease in handset sales at a top tier mobile phone OEM, where we have a substantial share of the charger business.

Sales in the consumer and industrial markets increased sequentially by mid- and low single-digit percentages, respectively. These markets, which account for nearly 70% of our total revenues, tend to be better indicators of overall demand trends, since the encompass a broad range of applications, customers, and geographies, whereas the more concentrated computer and communications markets tend to be more prone to quarterly fluctuations.

As further evidence of an improving demand environment, we saw a sequential increase in bookings of better than 10% in Q1, resulting in a book-to-bill ratio significantly above 1. We have seen particularly strong bookings for our high-power IGBT driver products, which are focused on industrial applications. We are awaiting an indication of accelerating demand, at least in certain corners of the industrial market.

Based on strong order trends, we expect high power to grow nicely in Q2. And we are equally encouraged by the long-term outlook for high power as that business builds momentum behind new design wins, helped by an improving demand environment for infrastructure in China.

Recent design successes include a new high voltage DC transmission link in southern China, multiple solar and water projects, and a large-scale DP link to Germany from an offshore wind farm. We are equally encouraged by design activity across our low and mid-power businesses. Our new LYTSwitch family of high voltage LED drivers has been extremely well-received, thanks to its combination of high efficiency, reliability, ease of design, and excellent dimming performance.

Overall activity in LED lighting continues to be brisk, with nearly 100 new designs won during the quarter, and revenues up more than 30% from a year ago. In the mid-power market, which includes applications from 50 to 500 watts, our products continue to gain traction in a range of applications, including street lighting, appliances, and main power supplies for TVs and PCs. And we had multiple design wins in each of these areas in Q1.

Energy efficiency is a major driver in this market. Most notably, the new European limitation on standby power usage, which took effect earlier this year, and is driving adoption of our energy saving CapZero and SenZero Isis in a variety of applications. Energy efficiency has been an equally important driver in low power applications.

In the first quarter, we won our largest design to date for a zero standby application, in this case, a design for one of the world's largest TV makers. This is an example of an OEM going well beyond the requirements, tapping into growing awareness of energy usage among consumers, and using efficiency to differentiate products. We believe this is a long-term trend, and no company is better positioned than Power Integrations to take advantage.

Before I turn it over to Sandeep, I'd like to touch on a couple of other recent developments. In March, we announced a new addition to our executive team. Radu Barsan has joined Power Integrations as Vice President of Technology, and will be leading our Technology Development, Foundry Engineering, and Quality organizations. Radu was most recently CEO of a privately-held start-up company, and previously held succession of engineering management roles at Cirrus Logic, AMD, and Cypress Semiconductor. With more than three decades in the industry, Radu has an outstanding track record of commercializing new silicon and compound silicon technologies in leading engineering organizations at companies, both large and small.

He is taking over responsibilities from Derek Bell, who will be retiring this month after 12 years with Power Integrations, and a distinguished four-decade career in the technology industry. Power Integrations would not be where we are today without Derek's leadership, and we wish him well -- and wish him the best in his retirement.

Lastly, I'd like to note two key core decisions in recent weeks in our ongoing patent litigation against Fairchild Semiconductor. In late March, the Federal District Court in Delaware issued post-trial rulings in our second lawsuit against Fairchild, following last year's jury verdict in which Fairchild was found in breach two of our patents. In its post-trial decisions, the Court not only confirmed the validity of our asserted patents, but also ruled that Fairchild infringed an additional patent, further expanded the list of Fairchild products subject to potential legal sanctions.

Also in late March, a Federal Appeals Court affirmed a lower court ruling related to our first Fairchild lawsuit, in which Fairchild was found to infringe several of our patents, a ruling that sustained a permanent injunction against more than 100 infringing Fairchild products. In its written division, Appeals Court stated that Fairchild had competed by reverse engineering and copying our products, noting that Fairchild had, quote, fostered a corporate culture of copying. This stark language accord of that original District Court ruling, in which the Court rote that Fairchild had engaged in, quote, industrial stalking methods and blatant copying of our products.

In this decision, the Appeals Court did identify certain aspects of the case for reconsideration by the District Court, including issues surrounding the cancellation of damages. Nevertheless, we are gratified that the decision leaves no doubt as to which one of these two companies is a true innovator. And we continue to believe that we are entitled to compensation for the harm done by Fairchild's repeated infringement of our intellectual property rights.

With that, I'll turn the call over to Sandeep for a review of the financials.

Thank you, and good afternoon. Since Balu has already covered the sequential revenue drivers in his remark, I will start with gross margin, and then quickly cover the remainder of the financials, before we take your questions.

Non-GAAP gross margin increased 10 basis points sequentially to 52.9%, coming in above the high end of the expected range, due to a favorable end market mix, reflecting the sequential revenue trends. On a year-over-year basis, non-GAAP gross margin was up more than 400 basis points, due not only to mix, but also our successful cost reduction initiatives. On a GAAP basis, gross margin increased by almost two full percentage points to 51.7%, as we have now exhausted the inventory that was marked up in conjunction with the acquisition of Concept last year.

As discussed on prior calls, we see the possibility of a slight pullback in gross margin over the middle two quarters of this year, as our overall end market mix becomes a bit less favorable, and as some newer products begin ramping in the second half. However, our gross margin does not yet reflect the recent upward movement of dollar versus the Japanese yen, which reduces the cost of (inaudible) from our Japanese foundries. This benefit will begin flowing through meaningfully in the December quarter, and should help offset the negative effects of a less favorable mix. All told, we now expect our full-year non-GAAP gross margin to be in the range of 52% to 53%.

Turning to expenses. Non-GAAP operating expenses for the first quarter were within our projected range at $26.3 million, up about $800,000 sequentially, driven mainly by higher payroll taxes and the fact that the fourth quarter expenses were restrained by our year-end shutdown. GAAP operating expenses were $30.8 million, including $1.1 million of acquisition-related amortization expense and $3.4 million of stock-based compensation expense.

Our tax rate for the first quarter reflect the outcome of last year's favorable resolution to our tax audit, as well as the reinstatement of the federal R&D tax credit. Specifically, the non-GAAP tax rate fell to just under 5% for the first quarter, and I expect it to be in the mid-single digits for the full year as well. Our GAAP effective tax rate was negative for the quarter, reflecting the retroactive application of the 2012 R&D credit, the benefit of which we excluded from our non-GAAP results.

Earnings on a non-GAAP basis was $0.47 per share, flat sequentially, but up 31% from a year ago, due to the combination of higher revenues and gross margin, as well as the lower tax rate. GAAP earnings for the quarter came in at $0.37 per diluted share. We generated $21.6 million of cash flow from operations in the quarter, and utilized just less than $4 million for capital expenditures. We also paid out $2.3 million in dividends during the quarter, reflecting the increase in our quarterly payout, as announced in conjunction with last quarter's earnings release. All in all, total cash and investments increased nearly $24 million during the quarter to $119 million.

The rest of our balance sheet remains in excellent shape, particularly internal inventories, which decreased sequentially in terms of dollars, and remains well within our targeted range at 107 days. Channel inventory increased during the quarter to about 6.5 weeks, mainly due to the abrupt slowdown in the PC market, which we serve primarily through distribution. As a reminder, we recognize distribution revenues on a sell-through basis worldwide for all products except IGBT drivers, so the increased distribution inventory does not create an overhang on our revenue growth for Q2.

In fact, based on the favorable booking trends that Balu discussed in his remarks, we expect revenues of between $79 million and $85 million in the second quarter, which should be an increase of about 3% to 10% sequentially. The width of that range reflects both the continuing uncertainty of the current macro environment, as well as the ever-present challenge of forecasting revenues, given our sell-through revenue recognition policy, which applies to about two-third of our total sales.

We expect non-GAAP gross margin to be in the range of 52% to 53%, while non-GAAP operating expenses should be approximately $27 million, plus or minus $0.5 million. As mentioned earlier, I expect the non-GAAP effective tax rate to remain in the mid-single digit, while the GAAP tax rate for Q2 should be somewhere in the low single digits.

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

Thanks, Sandeep. At this point will open it up for Q&A.

And in the interest of time, I'd like to ask callers, please to observe a limit of two questions at a time. And we will be happy to come back around for a second round of questions, time permitting.

Operator, would you please give the instructions for the Q&A session?

Yes Sir.

(Operator Instructions)

The first question we have comes from Vernon Essi of Needham & Company.

Thank you very much for taking my question. Can you hear me all right, guys?

Yes.

Okay. Sorry about the connection here. I just wanted to revisit, Sandeep, your comments on the gross margin as it relates to the mix going into the second quarter, and I guess as I hear it from your statement you have a handset drop occurring, which would, in theory, sort of improve the mix, and then going into the third quarter it's not clear to me what would be working against that. And then it almost seems like it washes out at the end of the year. Can you just walk through the mechanics of that again, please?

Yes. So as we had given guidance at the beginning of the year, we had expected our communication business to increase, which based on the macro trends and what happened with one of our key customers, that impacted it in the other direction. However, we still believe that the communication segment will grow for us in the coming quarters, and given what -- how mix can impact us plus or minus, that's why you're seeing the range we have given from 52% to 53% at this point of time. And as far as the yen impacting us, that will start happening us and benefiting us more in the fourth quarter, whereas we had indicated to you in the first quarter or so, beginning of the year, that we also have new products introductions coming in the second half, and typically when new products come out, the margins are lower and they have a kind of an offsetting effect to the benefit we would get from the yen towards the end of the year.

Okay, can you remind us with a new product introductions would be, specifically?

We don't generally discuss new products until they are out in the market.

Okay. And then just my follow-on question. A lot of attention paid to the LED industry recently at Light Fair a couple weeks ago, and you obviously have a pretty sizable market share of the LED driver market for incandescents. It seems, though, your growth rate has been consistent, but I'm curious, I always question, I suppose, but have you seen any signs that we are sort of in an inflection moment? We have a very, obviously, a major North American vendor is now out there with a low-priced bulb. Have you seen any responses in the market that would lead you to believe revenue could accelerate in 2013?

Well, we certainly have seen signs, in terms of the Light Fair and so on, a lot of activity, but in terms of actual revenues inflecting, we haven't seen that yet.

Okay. Thank you.

Thanks, Vernon.

Next we have Tore Svanberg of Stifel Nicolaus.

Yes, hi. This is Evan Wang calling for Tore. I was wondering if you could comment a little bit about your TV design win. Could you give us some idea about maybe the timing of this design win, as well as the revenue potential?

Well, the timing-wise, the design win occurred in Q1, and typically it takes one to two quarters before it ramps up. It is the largest PC standby design win with zero standby, I'm sorry TV standby. What did I say? I said PC, sorry. The largest TV standby design win we have won with zero standby, and we are enthused because is one of the largest TV makers. They usually set the trend in the market. So we are very optimistic that other companies would go for zero standby, because of that.

Okay, great. Thank you for that. And for my second, or follow-up question, I'd like to ask about the handset that Vernon Essi mentioned earlier. The California Energy Commission had put out a document talking about the California Quality Bulb. Could you comment on that requirement, and whether you have any distinct advantage in fulfilling, or for meeting that quality requirement for eligibility for the rebate?

Yes, we certainly meet all of the quality requirements of California Energy Commission. I think what they're trying to do is make sure that the type of bulbs that are sold in California meet significant minimum threshold in terms of efficiency, in terms of efficacy, in terms of dimmability, and so on, and so forth. And it is in reaction to some bad experiences they've had with CFL lamps, where there were a lot of lamps sold with claims of long life that didn't happen, and the quality of the color was not so good. So they're just taking precautions. Suffice to say, we meet all of those requirements.

Great. Thank you very much.

You're welcome.

The next question we have comes from Ross Seymore of Deutsche Bank.

Hi this is Mike Chu for Ross. Thanks for taking my questions. I know it's hard for you to see sometimes where your products are actually being used until after the end of the quarter, but on the softness that you saw in 1Q in the communications and computing segments from a handful of customers, do see this as a pause? And should we expect to see some snapback in these areas on normal seasonality, and perhaps continuation of the ramp in your design wins in both the handset side and on the PC power supply side?

I think I would agree, because if you look at the decline in the computer segment of 20%, that seems like a little bit of a over-reaction, because what happens is that the supply chain, there may be inventories in different places, and since we sell to a power supply manufacturer, it is very possible that they are reacting probably more than they should be because of the slowdown. So that's a possibility. And that could also be true in cell phones, but it's hard to tell, because there is so much fluctuation from quarter to quarter for various reasons.

For one thing, we don't necessarily follow the shipments of chargers, again because of the long supply chain, and also the timing of purchase of chargers. Secondly, that market is volatile because the share of business that goes to a particular vendor can change quarter to quarter, even the ordering patterns can change. They could buy a lot in one quarter and not buy as much in the next quarter. So it's very hard to determine on a quarterly basis what happens, it's much easier to say in the long-term. We are very optimistic about this market, because the trends in this markets are going in our direction, Higher power, smaller size, and so on.

Okay, and then on my follow-up, just wanted to ask you about in your last call, you had mentioned some strength that you were seeing in China. At a high level, we've been seeing a little bit choppy macro data out of that country. I was wondering if you are seeing any change in the environment there for your products?

Yes. We had two China customers ramping in Q4, and one of them is not as ramping as fast as we hoped. And the second one, again that ramp rate is not as high as we hoped. So it looks like there was a slowdown in Q1. Certainly the shipments of phones has slowed down across the board by, I think low double digits. So that has an impact at a macro level for us.

Okay, and on the -- I guess on China, the industrial side as well? The IGBTs, any change in the demand patterns you are seeing from -- in that segment, as well?

Yes, we are, it's actually positive. The IGBT driver demand in China is growing very nicely. We expect our high power revenue, which is basically IGBT drivers, to grow in Q2 relative to Q1 very nicely.

Great that's helpful. Thank you.

You're welcome.

The next question we have comes from the location of Andrew Huang of Sterne, Agee.

Hi guys, can you hear me okay?

Yes we can hear you, Andrew.

Okay. I guess the first question is on the weakness in the computer end market, can you say whether or not that was exclusively standby power suppliers, or was it primary as well?

Well, it was primarily standby power supplies. That is the largest portion of our revenue in the computer segment. The main power supply was also down, but not to the same extent. It was down because the programs we are in were down, but we also got some new additional business. So the overall impact was less in the main power relative to the standby.

Right. Do you think that computers should rebound in Q2?

That's a good question. It's always hard to predict the macro market. If I assume that there has been some over-reaction on the PC standby, it could potentially rebound.

Okay. And the second question, my follow-up, is related to your TV design win. I guess you described it as having zero standby power. So can share with us how that works? Like, you have the TV that's kind of waiting for the remote control signal. How do you have it running on zero power?

Good question. It would be hard for me to explain that without going into technical details, but suffice to say that our LinkZero product is used to reach that zero consumption, and the receiver for the remote control is still on, and it periodically checks to make sure that it's not receiving any signals. But most of the time, there's nothing going on.

Got it. Thank you very much.

You're welcome.

(Operator Instructions)

Next we have Christopher Longiaru of Sidoti and Company.

Hello, how are you doing, guys?

Doing well, thanks.

So my question had a little bit to do with PC, once again. In your opinion, at this point, judging from what you've seen going into April, would you call your computing revenue kind of a bottom at this point? Or do you expect, within your guidance that you gave for June, is there some continued weakness in PC?

Well, the same answer I gave earlier. It appears that this might be an over-reaction, in which case it could come back some in Q2, but no way to be absolutely sure. But in terms of share, we have actually grown our share in PC standby in Q4. So certainly that will again indicate there is a possibility it could come back, given the level of decline we have seen in Q1, which it seems to be quite a bit more than actual demand.

That make sense. And you can you comment on inventories and how they trended over the course of the quarter and into April?

I mean we had slowed down a bit in the fourth quarter, and pretty much if you look at -- if you're looking at our internal inventories, we are within that. Now, as far as the channel inventories, obviously they tended to go up during the quarter because of the PC abruptness that -- the slowdown that we saw, and that's why the weeks in the channel went up.

Got it. Okay, that make sense. And then just in terms of your TV design win, are there others going on here, or was this one that was ahead of the curve, because they went and beat the standard? As you said, they went substantially above and beyond what the standard requires, or do you think this is a trend for television manufacturers, that they're going to continue to go above and beyond the standard?

We are clearly seeing a number of manufacturers going well beyond the requirements of the standard. In fact, I would go as far as to say that the OEMs are the ones who are driving the stack at this point, not as much as standards. Although standards do play a role because it applies to all manufacturers, and generally the large OEMs tend to be drivers [into] energy efficiency, whereas the smaller ones will be followers.

Got it. Okay, I'll jump back. Thank you, guys.

Welcome.

The next question we have comes from Sumit Dhanda of ISI Group.

Hi, this is Jason Jones for Sumit. I didn't hear you guys comment on the order patterns in the quarter, other than the totals. Can you comment on that at all, the linearity bookings?

Yes, the orders were very significantly high in January and came down pretty much to 0.5 of the January levels in February. And then we saw it ramp back up again, and then the month of April has been fairly strong again.

Okay, and the, I know you don't like to talk about it, but in the turns for the quarter, can you comment on those, with a slight [shipment] midpoint?

Looking forward, yes, somewhere in the low 40s.

Yes, Jason. For Q1, the turns, based on the shipments we did, the turns were in the high 40s. Of course, we recognized less revenue than what we shipped during the quarter, as we mentioned in the script. But for Q2, in order to meet the midpoint, if we assume that shipments and revenues are equal, it would be requirement somewhere in the low 40s.

Perfect. Okay, and then sorry, just one last quick one. The deferred income is getting up there a little bit. Is that reflecting this effect of the PC business in the channel?

Yes, and that's the weeks in the channel going up.

And could you just repeat what the number was for the weeks? I missed that, I'm sorry.

About 6.5 weeks.

Perfect. Okay, thank you very much.

Thank you.

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

Yes, Hi. I had meant to ask about handset. The sharp decline that you saw, would you characterize that as a push-out of a program that you were expecting to ramp, or was this an ongoing program?

This is an ongoing program with one of our tier one customers who saw a significant decline in shipments in Q1.

Okay. Great. Thank you very much. That's all I have.

(Operator Instructions)

Next we have follow-up from the location of Andrew Huang of Sterne Agee.

Thank you. Can you -- I seem to remember you talking about getting a primary parcel-type design win for the TV this year? Is that correct?

That is correct.

And is that still within your expectations for this calendar year?

It is. I believe, our second TV design win, and it is, again a large company, but we are in our first program there. So we are encouraged that we got into this company, and we are optimistic that we will get additional models as we go along.

Okay. Can you give us a sense of what the dollar content is? Is that primary TV power supply as opposed to the standby power supply?

Good question. I don't have it with me, but it is not a very large revenue component, but it is a very significant strategic design win.

Okay. And then my follow up is, for the remainder of the year, Sandeep, can you give us some color on how we should think about OpEx through the end of the year?

Yes. I think through the end of the year there should be a gradual increase from the guidance we give for Q2, as we continue to make investments in R&D.

Okay. Thank you very much.

You're welcome, Andrew.

At this time, it appears that we have no further questions. We will go ahead and conclude our question-and-answer session. I would now like to turn the conference back over to management for any closing remarks. Gentlemen?

Okay. Thank you, Mike. As we have no more questions, we will end it there. Thanks, everyone, for listening. There will be a webcast replay of this call available on our website at investors.powerint.com. Thanks everyone for listening, and good afternoon.

And we thank you, sir, and to the rest to management for your time. The conference is now concluded. We thank you all for attending today's presentation. At this time, you may disconnect your lines. Thank you, and take care everyone.