Power Integrations Inc (POWI) 2015 Q2 法說會逐字稿

I'd like to welcome everyone to the Power Integrations second quarter 2015 results call. (Operator Instructions). thank you. Joe Shiffler, you may now begin.

Thank you. Good afternoon and thanks for joining us to discuss Power Integrations financial results for the second quarter of 2015. With me on the call are Balu Balakrishnan, President and COO 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 GAAP results.

Our discussion today including 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, plans, 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 our most recent Form 10-Q filed with the SEC on April 30, 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.

Now I will turn the call over to Balu.

Thanks, Joe, and good afternoon. Like many of our in industry peers we experienced tougher than expected demand in the second quarter reflecting global macro economic uncertainty as well as challenging conditions in certain ends markets. Revenues from the computer market declined nearly 10% sequentially in the second quarter after falling by more than one-third over the prior two quarters. Consumer revenues were also tougher than expected. Declining slightly compared to the prior quarter driven by appliance application, which account for the majority of the consumer category and exhibited tough demand across both Asian and European customers.

Communications revenues increased slightly from the prior quarter as a significant reduction in sales related to Korean end customers was offset by growth in the rapid charge design at Chinese handset customers. Sales in to industrial end-market grew more than 10% sequentially with sales of our high power (Inaudible) driver product rebounding as expected following a drop in Q1. While LED lighting revenues also grew nicely on a sequential basis.

All in all second quarter revenues were $85.3 million up 3% sequentially but below our target range of 5% to 10% growth. Fortunately the possibility of weaker than expected demand became apparent early enough in the quarter that we were able to adjust our operating expenses coming in about 5% below the midpoint of our projected range. These expense savings combined with slightly higher than expected gross margin enabled us to deliver non-GAAP earnings of $0.47 per share up from $0.43 in the prior quarter.

Cash flow was also strong with cash from operations coming in at $25 million for the quarter. In view of this strong cash generation, our healthy balance sheet and our belief in the growth potential of our business our Board of Directors has authorized a new $30 million share repurchase plan that follows a quarter in which we bought back more than 1.5% of our outstanding shares and continues our pattern of using our balance sheet to generate value through a combination of carefully targeted M&A, dividends and buyback.

While revenues for the quarter were less than expected, demand did improve in the latter part of the quarter with both sales and booking for the month of June rising significantly compared to April and May. While macro economic trends remain a reason for caution, we believe sequential revenue growth is likely in the third quarter with an expected range of flat to 7% higher compared to Q2.

We expect that the primarily driver of our growth in Q3 will be the continued ramp of rapid charging designs for the mobile device market. Rapid charging introduces challenges that power supply designers have not previously confronted in the largely commoditized market for standard low power charges. Delivering two, three or even four times as much power from an enclosure the same size as that of a traditional charger is a non(Inaudible) task requiring a high level of integration and energy efficiency. Our new InnoSwitch products are exceptionally well suited for rapid charge application, and we are now in production with InnoSwitch at many of our top tier handset manufacturers. We believe the requirements for rapid charging and the capabilities of InnoSwitch will enable us to increase our charge of the charger market in the years to come with greater dollar content per charger than we have typically earned in low power Chargers.

As discussed in our prior calls, our initial roll out of InnoSwitch product has focused on mobile device chargers because of the immediacies of the opportunity. However, just like earlier flagship product families like TopSwitch, TinySwitch and LinkSwitch InnoSwitch devices address a broad range of power supply applications encompassing hundreds of millions of AC/DC power supplies annually. While most of these applications are already served by other products lines the higher level of integration offer by InnoSwitch not only strengthens our competitive position in this market but also brings the material increase in our dollar content. InnoSwitch has already sparked a turn around in our communications category where the sales are up more than 20% for the first half of 2015 compared to a year ago. We believe it has the potential to accelerate our growth in the other end markets as well beginning next year.

In the consumer market InnoSwitch has been qualified at two top tier major appliance manufacturers. We have also now won our first InnoSwitch design in the computing market with an ultrabook charger and in the industrial market with an UPS power supply design. Overall design activity with InnoSwitch is robust particularly with the new DoE efficiency standards looming and we expect it to be a significant growth driver in 2016 along with our new LinkSwitch product family which enables low cost DoE compliant designs at the lower end of the power scale.

We also look forward to a resumption uploading our high power and LED businesses both of which grew nicely in Q2 after dropping in the first quarter. While currency effects and softness in energy markets continue to be a headwind in the high power, we are seeing strength in renewable energy markets which account for a substantial portion of our high power revenue. Mean while we have whole another effort in LED lighting to focus on applications where the reliability, efficiency and size benefit of our product are most appreciated particularly in commercial and industrial lighting, street lighting and brand name bulb. We continue to devote significant R&D resources to LED lighting and high power and we have a promising pipeline of new products on the way in both areas including products that will roughly double the size of our market opportunity in high power a key synergy of (Inaudible) acquisitions that we expect to come to fruition starting in 2015.

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

Thank you and good afternoon. I will quickly cover the Q2 financial and the Q3 outlook and then we will open it up for Q&A. My prepared remarks will focus mainly on the non-GAAP numbers which are reconciled to the corresponding GAAP figures in the tables accompanying our press release.

Q2 revenues increased 3% sequentially to $85.3 million dollars. The industrial end-market was the primarily driver of growth increasing more than 10% from the prior quarter. Growth in the industrial revenues was broad based with high power and LED lighting leading the way. Communications revenue increased by a low single-digit percentage as the continuing ramp of rapid charge design at Chinese handset end customers was largely offset by softness at Korean end customer.

Consumer revenue decreased low single-digits reflecting softness in the appliance market while revenues from computing applications were down high single digits sequentially. Revenue mix for the quarter was 36% consumer, 36% industrial, 21% communication and 7% computer. Non-GAAP gross margin for the quarter was 53.1% unchanged from the prior quarter. That was a bit better than expected reflecting the relative strength of the higher margin industrial end-market.

As Balu indicated, we responded quickly to the demand trends we saw in the weeks after giving our Q2 outlook and we took a number of steps to contain expenses. As a result of these efforts non-GAAP operating expenses for the quarter were $30.2 million about $1.5 million below the midpoint of our forecast. Sequentially that is an increase of just 2% despite the fact that our annual merit increase took effect April 1.

Continuing down the income statement other income for the quarter was slightly above zero as interest income was offset by unfavorable currency fluctuations. The non-GAAP tax rate for the quarter was 5.5% resulting in non-GAAP net income of $14.2 million or $0.47 per share.

Turning to the balance sheet. We exited the quarter with $171 million in cash and short-term securities down about $2 million from the prior quarter. Cash flow from operations for the quarter came in at $25.1 million while the capital expenditures were just under $2 million. We utilized $22.3 million for share repurchases buying back approximately 460,000 shares during the quarter. The buyback was particularly activity in the later part of the quarter which should result in a lower weighted average share count for Q3. Less than $1 million remain on our buyback plan at quarter end, but as Balu noted, our Board of Directors has allocated an additional $30 million for further repurchases. As in the past, we will make use of a predetermined price volume metric that guarantees (Inaudible) relationship between the stock price and the pace of buyback activity.

Inventory on our balance sheet at quarter end was 142 days on hand. A decrease of five days from the prior quarter and that should continue to trend down gradually through the second half of the year based on our current revenue projections and lower production level. Channel inventories also decreased during the quarter falling by nearly a full week to about 6.7 weeks.

Turning to the outlook. We expect revenues for the third quarter to be in the range of that to up 7% on a sequential basis driven mainly by growth in the communications market. This should result in a less favorable end-market mix from a gross margin standpoint in addition to the ramp of new products and the effect of reduced production levels. We do expect an offsetting benefit from the effects of the stronger dollar versus the Japanese yen which reduces our (Inaudible) cost.

All things considered, we expect Q3 non-GAAP gross margin to be in the range of 52.5% to 53%. With respect to expenses we intend to continue managing our spending carefully in light of the uncertain demand conditions. Specifically we expect non-GAAP OpEx for the September quarter to be roughly 30.5 million dollars which would be just a slight increase from Q2. For the year we are on track for expense growth of just 3% to 4% despite the acquisition of CamSemi in January. Organically our full year non-GAAP expenses should be roughly that compared to last year. Lastly, I expect a non-GAAP tax rate for the third quarter and for the balance of the year to be between 6% and 7%.

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

Thanks, Sandeep. We'll open it up now for the Q&A session.

(Operator Instructions). Your first question comes from the line of Ross Seymore with Deutsche Bank. Your line is now open.

Hi guys and I apologize. We're juggling a few calls tonight so if it is redundant with what you've already address I apologize. But when you look at it as a whole I can see the com side is ramping up but it sounds like everything else has been weak. Can you talk a little bit about the trajectory of the bookings you have seen and how much of what you're seeing do you believe is end-market inventory burn? I realize you guys recognize and revenue and sell through, but how much of this is inventory versus true demand being weak?

Well, first of all, we actually grew nicely in industrial sequentially. We grew a little over 10%. And the consumer market was slightly down primarily because of the appliance being soft, which is very broad based. The PC was the biggest challenge. It was down significantly from Q2 and communications actually grew as you said. So in terms of the booking spend the April booking was similar to March but the sell through in the April which we only found out in May was weak. So we based on our forecast for Q2 on the bookings in April which was quite good and in fact the sell through in March was very strong so we expected the April to be similar to March but that wasn't the case. So we decided that -- well, at the same time we also heard a news report that PC is continuing to be weak and the Korean OEM still having challenges in the marketplace in terms of demand. So we decided to cut back on our expenses starting in May. And in terms of bookings in May the bookings were weak and also the sell through in May was weak. And then June came back actually quite strong. The bookings were very strong in June and sell through was also strong in June. So that is kind of the flow. It was May and April bookings were similar and then June was very strong.

And how was July.

July is also strong but not quite as strong as June. And our assumption is because the sell through was so weak in April and May our customers' inventories were down so there was some extra business in June and we are hoping June is a recovery from the macro but it is hard to tell with one month. But July is quite strong and we are cautiously optimistic that we are coming out of this downturn.

I guess a couple of more precise questions. I know you discuss the rapid charge design wins that the China handset manufacturer offset some of the weakness in the Korea, but some of the data points we have been seeing about the China handset market itself being weak does that give you any pause looking forward as far as how those different customer bases can offset each other?

Since we are getting into this rapid charging market it doesn't necessarily correlate directly with the overall health of the Chinese cellphone vendors. All of our projections show that our rapid charging revenue will continue to grow in Q3 and Q4 and onward. So we are quite bullish about that market. Our biggest concern is the overall macro that will effect broadly all markets.

Okay. And the last one more of a housekeeping one. I know you guys authorized another $30 million share repurchase program. Can you just tell us how much cash you have on shore currently?

The majority I would say a bulk of the cash is on shore.

Great, thank you very much.

Thanks, Ross.

Your next question comes from the line of Tore Svanberg with Stifel. Your line is now open.

Thank you. First question is on rapid charge but I was hoping maybe you could talk a little bit more specifically about USPC and if that is an area where power is starting to see some traction at this point or power delivery USPD or USPC either one.

From what we can see it sure looks like the quick charge is the most cost effect current solution but USPD is going to be long term solution for fast charging. Most of the OEMs are previously considering going to USPD for more than one reason one of them being it has a very small connector, type C connector. And the second one being it can deliver a lot of power even without any protocol it can deliver a lot of power. But with the USPD protocol the cable can deliver up to 100 watts of power which is very significant advantage if you are going to larger devices like notebooks.

Very good. And as my follow-up question you talked about industrial being up very nicely for you in the June quarter. I'm just wondering how that is looking not necessarily just for September maybe for the whole second half because my understanding is you have some new products and new programs ramping, so if you could just add some color on that would be great.

That's always a challenge because our bookings don't tell us where the products go. I would say if you look at our industrial there is really three different buckets. There is the high power, the LED and the rest of the industrial market. The rest of the industrial market generally correlates with what other companies see. And some companies also put the appliances in the industrial market and that may be the reason they are not doing as well in industrial. As far as we're concerned we have growth in all three of them. Although the growth was highest in the high power and the LED market. Our long-term thinking is that we will grow in the high power and LED. We will also grow in the other miscellaneous markets specially in power tools and smart meters and also industrial controls. But it is very hard to project on a quarterly basis exactly what is going to happen especially with these macro issues we are seeing which I'm hoping is going away but we don't know for sure.

Great. Just one last question. I was hoping you could update us on the integrated power talking specifically about potential new versions of InnoSwitch. If you had gotten some good customer response there and when we could start to see some more meaningful revenue from that.

So outside of cellphones we think we will start seeing revenue in all other markets; industrial, consumer and computer markets starting in 2016. We have a number of designs going on in those areas. We already talked about two designs that we won, one is the ultrabook the other one in the industrial market and appliance to the two major appliance companies qualify InnoSwitch but they have a long design cycle but we expect significant revenue contributions from non cellphone markets next year. And of course the cellphone market itself is in the early stages. It will continue to go also.

Very helpful. Thank you very much.

You're welcome, Tore.

Your next question comes from the line of Steve Smigie from Raymond James. Your line is now open.

Thanks. This is Vince Valentini in for Steve. First I wanted to know if you can talk about the competitive environment in LED and specifically are you gaining share in North American and Europe and have you been seeing any increase competition from the Chinese LED makers?

I think we talked about this before in the low end of the bulb market we have seen a significant competition from the Chinese companies, Chinese IC vendors and that is primarily in applications for third world countries where you don't need the efficiency, you don't need the (inaudible) and they don't need dimming. So it is really the commoditized part of the bulb market where we have decided not to play because it is not attractive for us. The reason it is not attractive is that it doesn't appreciate the benefits of integration such as fewer components count which means higher reliability longer lifetime and also higher efficiency and (Inaudible) isolation and so on and so forth. So we will play in the brand name bulb market those bulbs that are sold in the U.S. and Europe where you do need to meet these requirements and so we think those are attractive markets. In fact we'll be introducing a product specifically for that in the second half of this year. And beyond that we are doing very well in the high margin, significantly higher margin markets like commercial lighting, industrial lighting, traffic lights, signage and emergency lighting and so on which have the benefit of really using the benefits we bring from our integration plus those markets are much more fragmented and spread geographically so it is a lot easier for us to address than a small Chinese company and they do care about reliability a lot. So that is where we're focusing our efforts.

Okay. Thanks a lot for the color. And then going to the CT Concept business. I believe last quarter you said that that is an area where you can see perhaps high single digit growth in 2015. I was hoping you could talk a little more about 2016. Is this a business that can grow maybe 20% and how is that doing as far as gaining share.

Well, it is really hard to predict that far. We have a hard time forecasting even on the next quarter. But at a high level I would say that the renewable part of that business is where we are seeing the most significant growth specifically wind power and solar. There is a lot of capacity being installed in places like China, India and U.S. even Europe is slowing coming back and this is all driven by grid parity and below grid prices for electricity generated by solar and of course, wind has always been below grid for quite some time now. So there is definitely growth areas there. Traction is doing very well. So the only area that we have had challenges in is in oil exploration which a relatively small part of the business oil but that has been effected by the oil prices. The other impact we have had is in currency and Euro being strong (Inaudible) European revenue by a small amount because we sell only the high power products in Europe in Euros. And the other small impact is Russian currency which has basically taken the Russian revenue away. But all of that is behind us. Going forward we think that energy efficiency is going to drive this market. We have roughly about 10% share of this market and the rest of the market is essentially captive but increasingly going to out sourcing the IGBT drivers to CT Concept. And CT Concept which is now Power Integration is the only supplier, independent supplier of IGBT drivers right now.

Okay, great. Thank you very much.

You're welcome.

Your next question comes from Gus Richard with Northland. Your line is now open.

Thanks for taking my question. When I look at your PC business it looks like it is down by a whole one-third in the first half. And it is hard for me to reconcile that with the end-market even though obviously the end-market is weak was there a tremendous amount of inventory coming in to the year. I wouldn't expect at those levels a lot of inventory to be downstream from you.

The reason for that is we don't directly correlate the OEM shipment. We ship to the power supply companies so we seem to have -- we are not only disconnected in terms of timing but the volatility of our business is much higher than the OEM shipments. So if you go back a couple of years you'll notice that our revenues have gone down 20% one quarter and come back up 20% the next quarter and so on and so forth. So it is very difficult to correlate that with the end-market business. And the other thing unique of course, is that we have our main exposure in that market I mean our dominate exposure is PC standby followed by monitors and to a much smaller extent printers and monitors have not done very well in terms of shipments either.

I see. Do you expect that business to grow sequentially?

Well, we're assuming it is not going to decline sequentially because it declined so much but we are being very cautious and we really don't want to assume it is going to grow.

I understand. And on the consumer side you mentioned that there was weakness in appliances is that brown goods or is that air conditioners? How should we think about that going into the summer quarter?

It is all of it. So it is large appliances. I would say large appliances probably the biggest one and the AC, air conditioning and the smaller appliances are what you call brown goods. And it is also geographically distributed. It is not just any one geography it is across the world. And that is what makes us think it is a demand issue, worldwide demand issue. It could be because of the stock market decline China which may be shying customers away from making major purchases. It could be the Greek effect in Europe. It is really hard to figure out what is causing it. But we have a very, very good share and share in appliances doesn't change very quickly so it is purely a demand issue and it is very broad based (Inaudible).

And then own DoE-6 does that drive content to you guys in the external power supply market?

Yes, it does. Because the DoE-6 is very, very tight spec and a number of the existing products do not meet it so they have to switch over. The interesting thing is because it is so tight the new designs are more expensive because you have to have higher efficiency. And so even though there are a number of new designs that have been done the power supply guys and the OEM are reluctant to switch over until they have to. Because they don't want to ship a more expensive product ahead of the deadline which I think is February of 2016. So the ramp up I was expecting in the second half is not as much as I thought because people are waiting for the deadline before they switch over because of the increase in cost.

Got it. Is that also perhaps part of the problem in consumer is that your customers are burning off the old inventory (Inaudible) going to consumer?

It is possible but I really don't have a good feeling for that because of the long chain we have.

I understand . Okay. That's it for me. Thanks so much.

Thanks, Gus.

(Operator Instructions). Your next question comes from the line of Christopher Longiaru from Sidoti & Company. Your line is now open.

Thanks for taking my question.

You're welcome.

So just want to dive in to gross margin for the quarter and the expectations a little bit. The yen takes a little while to filter through were there any impact from the yen in the June quarter or is that more being seen in the September quarter.

It will be more in the September quarter and a little bit in the December quarter because of the inventory levels.

And then just in terms of the mix, higher mix of industrials this quarter about how much would you say that effected the gross margin positively in the June quarter?

If you look at we had guided somewhere between 52.5 and 53 and we came in al little over guided range so I would attribute more related to that. And in the following quarter the mix is swinging backwards because the growth sequentially will come more from communications.

Got it. And just in terms of the operating model now is this kind of a operating expense structure that you're going to aim to kind of keep level at this point, or do you still expect an increase in R&D spend sometime in the second half of the year?

The operating expenses for the balance of the year we have said we would keep it -- we said Q3 would be around 30.5 slight increase from Q2 and we expect Q4 to be flat with Q3.

And then just in terms of I know that you have a great percentage of the cash is offshore any plans for that cash at this point repatriating any of it, anything along those lines?

The bulk of our cash is actually in the U.S.

That's all I have. Thank you guys.

Thanks, Chris.

Your next question comes from the line of Evan Wang of Stiefel. Your line is now open.

Yes, thank you for taking my questions. I was wondering if you could add a little more color to your inventory plans for the rest of the year. I think you had mentioned that you expecting the level to come down. Does that reflect a more cautious picture to demand or how do we read into that?

If you look at it our traditional -- I mean our model has been 110 plus or minus 15 days, and you can see we (Inaudible) the 140. So what we are going to try to do is looking at where the demand was and we have had a little bit of a shortfall in the first half looking that and looking at what we are thinking as the second half we are kind of modulating our production levels which is also impacting the margin a little bit and we want to get back and that's why we'll have a gradual decline and we want to get back to our model. So that is why you see it taper down through the rest of the year.

Okay. And my follow-up question is about your gross margin trend and I know this is a little farther out but about 2016 you had mention that the InnoSwitch should start to penetrate other end markets in 2016. Will that help to drive gross margin expansion InnoSwitch (Inaudible)?

It is hard to predict 2016 because it will depend on the volume it will depend on the total mix. I think for modeling purposes I have always felt that historically if you look at it our margin has been somewhere in 52.5 to 53 on average. So that is where we are running at. So right now I think that is my best estimate at this point in time.

Okay, great. Thank you very much.

There are no further questions at this time. I turn the call back to the presenters.

Okay. Thanks very much. Thanks everyone for listening. I know it is a busy afternoon, so we appreciate everyone listening. There will be a reply of this call available on our website, which is investors.power.com. Thanks again and good afternoon.

This concludes today's conference call. You may now disconnect.