Power Integrations Inc (POWI) 2015 Q1 法說會逐字稿

Good afternoon. My name is Melissa and I would like to welcome everyone to the Power Integrations first-quarter 2015 results call.

(Operator Instructions)

Thank you. Joe Shiffler you may begin your conference.

Thank you. Good afternoon and thanks for joining us to discuss Power Integrations' financial results for the first quarter of 2015. 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.power.com for an explanation of our reasons for using such non-GAAP measures as well as tables reconciling these measures to our GAAP results.

Our discussion today, including the Q&A session, will include forward-looking statements reflecting our forecast of certain aspects of the Company's future business and financial results. Such statements are denoted by words like 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 dynamic and subject to 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 in part two of our most recent form 10-K filed with the SEC on February 10, 2015.

This conference call is the property of Power Integrations and any recording or rebroadcast 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. First quarter revenues declined 5% sequentially to $82.6 million in line with our guidance but below the midpoint of the range. Primarily reflecting continued softness in the desktop PC market.

Revenues in the computing category which is dominated by desktops, fell by nearly 20% sequentially and are up 35% in the past two quarters as the supply chain adjusts to the slowdown in the PC sales. Notwithstanding the softness in PCs and a somewhat mixed demand environment overall, we expect solid sequential revenue growth in the second quarter and we believe the driver's put in place to enable continued growth in the second half of the year.

Shipments increased nearly 10% in Q1 compared to Q4 in anticipation of stronger demand through the distribution channel in the June quarter. We also expect growth in key focus areas in Q2 such as our high power business, which is rebounding after a soft first quarter and the mobile phone market, where rapid charging programs continue to ramp.

We have resolved the supply constraints that affected sales of our new InnoSwitch products in the first quarter, even as demand for the products accelerates on the strength of new design wins. InnoSwitch is an ideal match for the demands of rapid charging which poses significant engineering challenges for our power supply designers in terms of size, efficiency and component count.

These challenges give us an opportunity for differentiation in a market that had become increasingly commoditized in recent years. These dynamics are driving a turnaround in our communications category which declined nearly 15% last year.

In the first quarter of this year, communications revenues were up more than 15% from a year ago in spite of supply constraints. And we expect the growth rate to accelerate in the second quarter as rapid charging continues to ramp.

While our initial rollout has focused on mobile device charges, InnoSwitch has a broad adjustable market comprising hundreds of millions of AC/DC power supply's annually. Many of these power supplies will be subject to the new mandatory federal efficiency standards for external power supplies scheduled to take effect in early 2016.

The so-called DOE-6 standard will apply not only to mobile devices but also [home] looking equipment, cordless phones, set-top boxes, LCD monitors and the countless other products that use external chargers and adapters. With InnoSwitch and our new LinkSwitch 4 product family we have a broad range of products to address the DoE-6 opportunity.

InnoSwitch is equally attractive for embedded power supplies and is showing strong design traction in the appliance market where the top-tier OEM has already qualified the product for use in a broad range of major appliance applications. Appliances have been a success story for us, thanks to tighter efficiency requirements, the increased use of electronic controls in both large and small appliances. And a reliable benefits of innovation, an increasingly important factor in big-ticket items like brand-name appliances.

With the arrival of InnoSwitch, which not only adds to a competitive advantage but also our dollar content, we believe we can sustain strong growth in the appliance market in 2015 and beyond. We also expect the industrial market to be a significant contributor to our growth this year and beyond. Led by our high-power IGBT-driver products as expected high-powered sales in Q1 were affected by softness in energy exploration markets and currency headwinds. However, we expect double-digit sequential growth in high-power in the second quarter driven by strength in solar and wind energy applications.

Overall, our revenue outlook for the second quarter is for a sequential increase of 5% to 10%. While projecting revenues beyond the current quarter is always difficult, we believe the stage is set for a good second half.

We expect continued momentum in the appliance and the high-power markets while InnoSwitch is poised to become a material revenue contributor as the year progresses. Particularly with the rapid charging and the new DOE standards becoming significant demand drivers.

Now with that I'll turn it over to Sandeep for a review of the financials.

Thank you and good afternoon. I will quickly cover the Q1 financials and touch on the outlook before we open it up for Q&A.

As usual I will focus my remarks primarily on the non-GAAP numbers which are reconciled to the corresponding GAAP numbers in the tables accompanying our press release.

First quarter revenues decreased 5% sequentially to $82.6 million. As Balu noted, the computer market was the biggest driver of the decline, falling nearly 20% sequentially on weak desktop demand and the consequent inventory adjustments in the supply chain.

Communications revenue were down mid- single-digit of seasonal softness at a large network equipment customer. Industrial revenues were also down mid- single digits as expected on lower revenue from high-power products. Consumer revenues decreased slightly as growth in appliances was offset by seasonal softness in consumer electronics.

Revenue mix for the quarter was 38% consumer, 33% industrial, 21% communication, and 8% computer. Non-GAAP gross margin for the quarter was 53.1% down from the prior quarter as expected primarily resulting from application and product mix most notably higher revenues from cell phone chargers and lower revenues from industrial.

Non-GAAP operating expenses for the quarter were well below our forecast, coming in at $29.7 million an increase of just to $600,000 from the prior quarter despite the addition of Cambridge Semiconductor which we acquired in early January. Excluding the acquisition, non-GAAP expenses decreased sequentially in spite of seasonally higher FICA taxes and the comparative affect of the December shutdown. The decrease is due partly to the timing of certain expenses that were pushed into Q2, but also reflects expense controls implemented in response to the weaker demand environment.

Continuing down the income statement, other income for the first quarter was negative $223,000 driven by unfavorable currency fluctuations. Including this item, which reduced earnings by $0.01 per share, non-GAAP earnings were $0.43 per diluted share.

Cash flow from operations was $17.7 million and the utilized $3.3 million for capital expenditures. The utilized $15.4 million for the Cam Semi acquisition as the net purchase price of $22.1 million was netted against the short-term loan issued to Cam Semi in December. Other uses of cash included $3.5 million in dividend payments and just under $1 million for share repurchases. We ended the quarter with $173 million in cash and short-term investment securities down about $2 million from the prior quarter.

Internal inventories picked up slightly rising by $1 million during the quarter, while channel inventories expanded to about 7.5 weeks ahead of stronger Q2 demand. Internal inventory should remain at roughly the same level on a [cash] basis through the June quarter and then trend down in the second half of the year. We have minimal [consolidated] risk in our product portfolio and are content to adjust inventory levels gradually as we have done throughout our history.

Turning to the outlook for the second quarter, we expect revenues to be up 5% to 10% sequentially led by the communication and industrial categories as well as a modest rebound in the PC market. We expect non-GAAP gross margin to be in the range of 52.5% to 53% down slightly from the first quarter driven by the continued ramp of new products and less favorable end market mix.

However, we expect gross margin to rise modestly in the September quarter as we begin to see the flow-through of lower cost wafers reflecting the more favorable dollar/yen exchange rate. We expect non-GAAP OpEx to be between $31.5 million and $32 million in the second quarter. The sequential increase reflects annual merit increases which were effective April 1 and expenses associated with our worldwide sales conference which also took place in April.

I do anticipate lower expenses in the September quarter as the impact of the sales conference rolls off and the FICA expenses begin to trend down. Lastly, I expect the non-GAAP taxes for the second quarter and for the balance of the year to be approximately 7%.

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

Thanks Sandeep. We will go ahead and open the call up for Q&A now. Operator would you please give the instructions for Q&A session?

(Operator Instructions)

Steve Smigie with Raymond James.

Great, thanks a lot guys. I just wanted to follow-up on a couple comments, the first one was you mentioned some strength into the back half of the year. You guys do typically have some seasonal strength in September. And I know that's one quarter, but since you mentioned the back half, could September potentially be up double digits?

It's a little too early to say what the third quarter will be. However, with the number of drivers helping us, we think it will be a good growth quarter. Specifically, we expect to see a growth in high-power and also InnoSwitch-based revenues. That should grow really nicely throughout the year.

Okay. And then just on the ramp of fast charge, you mentioned some capacity constraints there. Did those change what your initial assumptions would have been for fast charge revenue this year, or was that already factored in and so things are going as you might have expected at this point?

I don't think it will affect the overall revenue for 2015 in rapid chargers. It did restrict our revenue a little bit in Q1, but we are already caught up and we shipped whatever was necessary in April. So, I don't think it will have an impact and we expect the revenues to grow throughout this year.

Okay. And Sandeep, you mentioned the benefits going to gross margin on currency there. And modestly into September. Does it continue to incrementally improve modestly since then or are there enough issues going on with mix and other stuff that we shouldn't really be taking margin up here?

I think basically the mix is there, so what I would do for modeling purposes is from the Q2 levels I think the currency being favorable and the mix a little unfavorable, I think the benefit will be about 50 basis points or so in the third quarter and flatten out, or little bit, here and there from there.

Great. Thanks a lot guys.

Ross Seymore with Deutsche Bank.

Hi guys, I know, Balu, you talked about some capacity constraints in the rapid charge size. We've heard other company's talk glowingly about their wins in this space. Can you give a little bit more color about the competitive landscape in the space? How you are differentiated and are you better positioned with big flagship wins or smaller customers but a multitude of them? Any sort of competitive color about how POWI is situated would be helpful.

I think InnoSwitch is by far the best solution for rapid charging. We do have a couple of competitors in this space. But I have to say that we are doing extremely well compared to the competition. So far, we have six tier 1 customers in production and two tier 2 customers. And the feedback we have been getting has been very positive.

And then moving beyond that side of the equation, I know, Balu or Sandeep, you just talked about the gross margin and what the currency is going to do. When you started new product like InnoSwitch, we realize that the gross margins are lower and then they trend up over time. When does that start to become an actual tailwind to gross margin? Or even just the headwind dissipate?

One of the things that -- we said new products are the challenge and typically what happens is our products go into different end markets. Right now what is happening is the InnoSwitch is not only a new product but it's also focused on the communication.

And as you know, if we are going to expand this into other markets it will take a little time. And that's when you'll start getting some tailwinds as it starts going into the other market. We continue to do the cost reductions, which will start benefiting us as the year progresses, but just the mix is still quite a bit of a headwind compared to the benefit we are getting from here.

My final question on the computing side of things, we'd hope that it would only be a one-quarter issue where you went down substantially, like it had been the last couple times. This time, clearly the end market is part of the equation, but when you look forward, why do you expect it only to be a mild increase, when, if we look back historically and any time you drop roughly 20%, you have a pretty substantial snapback in the following quarter?

The honest answer is we don't know. So we thought Q1 would be flat, maybe even slightly up or slightly down. But we were surprised that it was down as far as it went down. Which is 20%, two quarters in a row it went down 20%.

I would have never expected that. It is true, in the past, we have had a very sharp snapback, but there are no indications this time that is going to happen, but I can't say for sure. We are modeling PCs to increase slightly in Q2.

And there is no market share issues as far as that double dip of down 20%?

That is correct. Our biggest exposure is to the desktop market through PC standby, and it's not a share issue in PC standby. And in fact, in other areas, like the main power supply, we are actually gaining share. We are also gaining share in monitors, where we have [won] number of new designs.

Great, thank you very much.

You are welcome, Ross.

Tore Svanberg with Stifel.

Yes, thank you. I was hoping you could comment first a little bit on order linearity. Power integrations tends to be a little bit different from all of the other semiconductor companies out there on timing of orders and stuff. I was hoping you could talk about linearity, both in Q1 and what you have seen so far this quarter?

So basically, what we saw in the last quarter, as Balu mentioned, we had a pretty strong shipment quarter, but not a sell-through quarter. We really shipped $88 million, but we recognized only $82.5 million. We had a pretty strong January in terms of booking, February because of the Chinese new year dipped down, and then March was lower than January, and then April has continued to be like March.

It's hard to look at the terms and say what it will be because there's so much inventory in the channel and considering we have shipped, [really] much more than we recognize revenue, that is what is also helping us think through as we look forward into the Q2 guidance.

Okay, very good. And the question on InnoSwitch, and Balu, you mentioned obviously this technology applies for other areas outside of cell phones, are there any devices we should start thinking about right now as having an important contribution? Or will those -- should just be dwarfed by the mobile phone opportunity?

In the short term, mobile phone would be the largest growth factor, simply because it has a concentrated customer base and the design cycles are shorter. But the InnoSwitch is applicable to all other markets. It's applicable to the PC market.

It's applicable to the consumer market, both in terms of appliances and entertainment products, whether it is set-top boxes or -- and so on. It's also applicable to the industrial market. It is just that they have longer design cycles, and therefore it takes a little bit of time before we start to see revenue growth in those areas.

The good news is the margins are higher, so that would help us in the long term. But just to clarify on the margins, we are making improvements, incremental improvements in cost of InnoSwitch, and we'll have a more significant improvement sometime next year related to [next-generation] technology that we would use to reduce cost quite significantly. We are very confident that InnoSwitch will come to margins consistent with all of the products we have.

Sounds good just one last question. You sound a little bit more upbeat on high-power for the second half of the year, and I know there's a lot of moving parts. But I also know that China is a big percentage of that business, and that's an area where we've heard about some potential weakness, especially on the industrial side. Are there some new programs and new products ramping in the second half that gives you more confidence about that business?

Yes. Specifically in solar and wind energy applications. We are seeing significant capacity being installed this year and next year. So that's where we see the most significant growth.

Where we have seen a little bit of a drag is in infrastructure-type projects, like high-voltage DC transmission and so on. But that's a relatively small portion of the business. Our number-one high-power business is motor control, motor drives, I should say, and the number two is renewables, and renewables is where we are seeing significant growth in the next few quarters.

That's very helpful; thank you very much.

You're welcome Tore.

(Operator Instructions)

Gus Richard of Northland.

Yes, thanks for taking the question and pronouncing my name right. Just a couple quick questions on the networking product, was that down in the quarter did you say?

(Inaudible).

Okay, and do you expect that to recover or is that in a state of decline going forward?

It's -- we don't know of any change in terms of share, so it is seasonally weak in Q1. And it also has a lot of variability quarter to quarter. Our expectation is that, in Q2, that will come back relative to Q1.

Okay. And then, in terms of your overall cell phone business, rapid charge plus everything else, do you expect to see double-digit growth in overall cell phones, or is there going to be a little bit less than that because of older products rolling off?

Are you talking specifically about Q2 growth?

Yes, Q2, I'm sorry.

Q2. Yes, it could very will be in double digits.

Okay, yes.

Just as an indicator, you can see cell phones now as a percentage of the total communications business this last quarter was nearly 60%. It was typically about 50%, so it's growing very nicely, with rapid and everything else.

Okay, got it. That's very helpful. And then looking at -- you haven't mentioned LED in this quarter, so I was just wondering what is going on with that market for you guys?

The LED revenues declined slightly compared to Q4. And that is quite seasonal. We have seen every first quarter for the last three years decline in LED revenue, and that was the same this quarter, as Q1.

Got it. And then, on DOE-6 products and the design wins, do you expect that revenue to start to ramp in the back half of the year, or is that a 2016 type of phenomenon?

It should start on the back half of the year. Because they have to get the designs done and get the production started. But we will see the full-year impact only in 2016.

Okay, so it will aid in some of the second half of the year?

Yes, it will ramp continuously through the second half, and obviously it will ramp up to the full volume by the end of the year.

Okay, got it. And last one for me, I'm sorry for so many questions, given the slow start to the year, it looks really challenging to get flat on your PC business. Is that a realistic expectation or do you think the snapbacks will be a little harder in the second half?

That's a good question. As I said, it's really hard to predict how PC market would do. But the good news is, it's not a shared issue.

We have a very significant share of the standby market, and we are growing share in the number of other areas, like the main power supply and the LCD monitors, so those things bode well. But it is very hard to predict exactly what it will do for the whole year.

Okay, thanks so much.

You're welcome.

Christopher Longiaru with Sidoti & Company.

Hey, guys, thanks for taking my question.

You're welcome.

Can you give us a little bit of color into how inventories trended over the course of the quarter and how orders trended, and maybe how they have looked into April? And what kind of turns number do you need to hit your guide?

Considering we shipped it last quarter, as a indicated nearly $88 million, and we basically recognize only $82.5 million, so you can see the turn's going to be a little difficult because you could have more revenue than shipments this quarter, right? Even taking that into consideration roughly we need high [40%s] turns like we had in Q1 to hit our number.

As far as the order pattern, as I indicated earlier, January was where we had the peak in orders, February was down because of Chinese new year, March came back, but not as high as January, and April has trended pretty close to March.

Just to clarify, Christopher, when you say turns, it's only based on what we shipped. Because, we don't know how much gets shipped through until the end of the quarter. In the first quarter, we shipped a lot more than we recognized in revenue, because the distributors bought quite a bit in March in preparation for Q2, which bodes well for Q2.

So we have to be careful when you say talk about turns, we can only talk about turns in terms of shipments, but not in terms of revenue. Having said that, in terms of shipments, the turns we need, if they were equal to revenue, plus what we have coming from Q1 shipments, is roughly the same as Q1.

That is helpful guys. I appreciate that. And then, just in terms of -- you said that you expect a little bit of the September quarterly operating expenses to come down.

Can you comment on any match costs or anything along those lines that have happened recently and that you expect to happen over the course of the year that alters your GAAP expenses? Are there any big blips or is it pretty consistent?

Basically, in terms of GAAP expenses I think, as you know, we have added, as a result of the Cam Semi acquisition. Now in Q1, we had the inventory write-up, which was about $300,000, which I think goes away because the inventory is turned over. Apart from that, the rest of the amortization that was added should be pretty linear.

Okay. That's all I have, thank you, guys.

You're welcome.

(Operator Instructions)

Steve Smigie with Raymond James.

Great, thanks for the chance for the follow-up. I was just hoping you could comment a little bit on CT-Concept in terms of growth opportunity for this year. Could that grow something like 20% this year?

Basically, as you know, the first quarter was much lower than the run rate. If you look at it -- it was a decline, nearly a double-digit (inaudible), we only did close to about $8 million. So I think 20% is maybe a little optimistic. I think it would be to high single digits, probably yes.

Okay, cool. And then, similar on consumer, can you talk a little bit about what kind of top-line growth percentage you think you could get this year?

It's hard to predict the whole year, but I think we will continue to get good share gains in the appliance area, with content increasing. And historically, last few years, we have been doing mid- to high-single digit growth there, too. And we should also gain share in the TV market, with our TV main (inaudible) product, and we expect to gain share in the set-top boxes also.

Okay great, thanks a lot guys.

You're welcome.

There are no further questions in queue at this time. I turn the call back over to Joe Shiffler for any closing comments.

Okay, we will conclude the call there. Thanks, everyone, for listening. There will be a replay of this call available on our website, which is investors.power.com. Thanks again for listening, and good afternoon.

Ladies and gentlemen, this concludes today's conference call. You may now disconnect.