Power Integrations Inc (POWI) 2015 Q3 法說會逐字稿

Good afternoon. I'd like to welcome everyone to the Power Integrations third quarter 2015 results call. (Operator Instructions). Joe Shiffler, you may now begin your conference.

Thanks, Connor. Good afternoon and thanks for joining us to discuss Power Integrations financial results for the third 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 our 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, plan, goal, anticipate, 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 July 31, 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 will turn the call over to Balu.

Thanks, Joe and good afternoon. Our third quarter revenues grew 4% sequentially coming in about the mid point our projected range in the face of a challenging demand environment. Weakness in industrial end market was more than offset by growth in the communication category where our new InnoSwitch products continue to win share in smartphone charges. InnoSwitch is well on it's way of becoming our next flagship product family with Q3 roughly doubling versus the prior quarter. In September we introduce two new products to help not only sustain our momentum in charger applications but also extend the benefits of InnoSwitch to other end markets. I will discuss those new products in more detail in a moment.

Our third quarter gross margin was sequentially lower reflecting the change in end market mix as well as the growth of InnoSwitch which is still early in its life cycle and has not yet been optimized from a cost standpoint. However a 5% reduction in operating expenses more than compensated for the lower gross margins resulting in a 17% sequential increase in non-GAAP EPS. We also generated nearly $25 million in cash flow from operations cash and made good use of our cash resources during the quarter buying back shares at average prices well below today's closing price.

Looking more closely at revenues, we saw sequential growth in three out of the four end market categories. The lone exception was industrial market where revenues declined by more than 10% reflecting the broad based softness being reported across much of the analogue semiconductor space. Revenues from the consumer market grew mid single digits sequentially on and (Inaudible) and appliances while computing revenues recovered slightly after several quarters of market driven softness. But the biggest driver of the growth was the communications end market where revenues increased more than 30% sequentially. Driven primarily by the ramp of InnoSwitch in smartphone chargers. The need for faster more powerful chargers is an emerging opportunity in the power conversion market requiring a higher level of integration and energy efficiency than traditional low power designs.

Our InnoSwitch products are extremely well suited for the needs of the market enabling us to not only gain market share but also increase our average dollar content per charger. This in turn has lead to a sharp uptick in our communications revenue this year with sales up 30% for the first nine months compared to a year ago. We believe rapid charging is a multi year trend that is still in its early stages with power levels continue rising over time as mobile devices become more power hungry, batteries continue to grow in size and OEMs increasingly view charging speed as a way to differentiate their products. These translate to our strength and we continue to double up our product portfolio to maintain our competitive leadership position in this space.

In September we introduced CHY103D the next generation of our interface chips that facilitates communications between charges and phones to safely and efficiently deliver the maximum power a phone can handle. Used in combination with InnoSwitch the power conversion IC the new chip implements Quick Charge 3.0 the latest generation of Qualcomm highly effective rapid charging protocol which boosts both speed and efficiency of the charge compared to the prior generation. We expect to begin high volume shipments of our first QC 3.0 design later this quarter for a top tier Chinese smart phone OEM. Another key product introduction during the quarter was InnoSwitch EP or embedded power launched in mid September. While our InnoSwitch (Inaudible) for chargers is already winning significant market share, InnoSwitch EP brings the same efficiency and performance benefits to embedded power supplies including standby and auxiliary supplies for home appliances, air conditioners, T.V., monitors, PCs and many industrial applications. As successful as we have been already in charge (Inaudible) InnoSwitch we believe the technology may prove even more attractive in embedded power supplies where the liability is often the most important consideration for designers due to the high repair and replacement of many end products.

After having sampled and qualified the product at multiple appliance OEMs over the summer, InnoSwitch EP has already scored its first design win at a top tier appliance maker. We believe that is the first of many more to come and while design cycles tend to be relatively long in many of these applications, we do expect InnoSwitch EP to be contributing revenues in 2016. We also expect healthy contributions in 2016 from our high power and LED lighting business both of which have faced headwinds in 2015 but looked poised to grow nicely in the coming years. We have a promising pipeline of new products in both of these areas including products that will double the size of our market opportunity in high power by extending our reach in to lower end i(Inaudible) drivers. These products are already sampling with key customers and we look forward to realizing this key synergy of the consent acquisition as they come to market in 2016.

Our confidence in the future of our business is perhaps best demonstrated by how we have deployed our cash resources in recent months. We have generated $67 million in cash flow from operations through the first nine months of the year adding to an already strong balance sheet. These resources have enabled us to take advantage of recent market volatility and repurchase shares at attractive prices. We bought back more than 2% of our outstanding shares in Q3 at an average price of below $40 per share utilizing the entire $30 million authorization we announced on last quarter's call. As stated in today's press release our Board of Directors has allocated an additional $30 million for further repurchases a decision that reflects the continued strength of our balance sheet and confidence in our growth strategy.

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

Thanks, Balu and good afternoon. I will quickly cover the Q3 financial and the Q4 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.

Q3 revenues were above the midpoint our guidance range increasing 4% sequentially to $88.9 million. As Balu noted, growth was lead by the communications market with an increase of better than 30% driven by the strength in smartphone chargers as well as residential networking applications. Consumer and computing revenues each grew mid single-digits while industrial revenues fell by more than 10%. The relative strength of communications revenue and the softness in the industrial market are clearly reflected in the changes to our end market mix. Communication revenue where 26% of total sales for the quarter up five percentage point from Q2 while industrial fell by 5 points to 31% of sales. Consumer and computer were unchanged at 36% and 7% respectively.

As many of you know, our gross margin is somewhat sensitive to end market mix with industrial and communications being our highest and lowest margin end market respectively. Non-GAAP gross margin for the third quarter was 51% down about two percentage points sequentially with mix being the prime factor in the decline along with the impact of new product ramps and lower production levels. Non-GAAP operating expenses decreased more than 5% sequentially to $28.6 million coming in well below our projections. A portion of the decrease was simply a function of timing as certain expenses we expected to fall in Q3 will instead be incurred in Q4. However it also reflects expense discipline as we continue to manage cautiously in light of the uncertain demand environment. Even with a modest uptick in the fourth quarter we are on track for non-GAAP OpEx growth of less than 2% this year inclusive of the (Inaudible) acquisition in earlier January. On an organic basis non-GAAP OpEx will be down for the full year compared to 2014.

Continuing down the income statement other income increased from the prior quarter reflecting a foreign currency benefit including this benefit which added about a penny to our EPS non-GAAP earnings were $0.55 per share up from $0.47 in the prior quarter. Weighted average diluted share count was 29.3 million shares down 2.5% from the prior quarter reflecting buy back activity. We repurchase 775,000 shares during the quarter for just less than $31 million at an average purchase price of less than $40 per share. Thus far this (Inaudible) we have bought back more than 4% of our outstanding shares at an average price of approximately $43 per share. In addition to the buy back we utilized $10 million in the quarter to support our future growth with the purchase of a third building in our San Jose headquarter complex. They building is currently fully leased to external tenants and will not effect our P&L materially in the near-term.

Other uses of cash during the third quarter included $3.5 million for dividend payments and $2.5 million of CapEx. Partially offsetting these uses of cash was strong cash flow from operations which came in at about $24.7 million for the quarter. All told cash and investments on the balance sheet decreased by $20 million during the quarter and stood at $151 million at quarter end. Inventory on our balance sheet decreased significantly during the quarter as we trim production to bring inventory back within our targeted range. We ended the quarter with 113 days of inventory on hand down 29 days from the prior quarter.

Looking ahead to the fourth quarter while the overall demand picture remains uncertain, bookings did increase modestly in Q3 versus Q2 and we enter the current quarter with a slightly higher starting backlog. All things consider we are projecting a fourth quarter revenue range of $89 million plus or minus $3 million which would be roughly flat sequentially at the midpoint. While end market mix is difficult to predict, we are modeling a neutral to slightly more favorable mix in Q4 and we believe that a slight uptick in margin is likely. Specifically we are projecting a range of 51% to 51.5% on a non-GAAP basis . Non-GAAP operating expenses will pick up somewhat as certain expenses were pushed from Q3 in to Q4 but should remain well under control. Specifically we expect non-GAAP OpEx for the December quarter to be between $29.5 million dollars and $30 million. I expect the non-GAAP tax rate for the fourth quarter to be between 6% and 7%.

With that, I'll turn it back over to Joe.

Thanks, Sandeep. We'll open it up now for the Q&A session. Connor, would you please give the instructions.

(Operator Instructions). Your first question comes from the line of Tore Svanberg. Your line is open.

This is Evan Wang calling in for Tore. Thank you for taking my question. You talked about industrial being a little softer, but then you also balanced that with maybe some high power business coming back looking good in the pipeline in 2016. I was wondering if you could talk about that high power whether it is dependent on a sound macro or are those decisions already made?

Hi, Evan. This is Balu. Yes, next year we believe that the high power market is poised to come back for multiple reasons. Obviously the macro being weak in China is a headwind; however, during the difficult times China tends to investment in infrastructure and there are a number of infrastructure projects that are coming up both in renewable area and also in transportation. And in transportation specifically locomotive and electric buses are going to do really well. We have number of designs going on not only for the buses in China but also locomotives in other countries that China ships to. So that is why we feel the high power will come back next year in addition to LED.

Great. My second question is about your Quick Charge 3.0 product. We know the Quick Charge 2.0 had a little bit of trouble in the beginning ramping up and I think it was known the customers had trouble making their decisions on which scheme to adopt. How do you see Quick Charge 3.0 ramping up versus 2.0 and how much of an overlap will there be between these two standards as 3.0 gets adopted?

So speaking generally it is still not very clear which one of these protocols is going to eventually win or be very popular. Having said that, many of the customers especially in China have decided to go forward with the Quick Charge. And one of them is actually going to switch over to Quick Charge 3.0 and we expect to start shipping to this large OEM starting in Q4. As far as the overall market, there are still other protocols that are being talked about and on top of that we also have the [USB PD] which is another option that customers have.

Having said that, we actually in the long-term don't care what protocol they use because InnoSwitch can be used with any of these protocols, and we will support whatever protocol becomes popular. In the mean while we are pleased that a number of customers have adopted Quick Charge, and we expect many of them to switch to Quick Charge 3.0 which provides a lots of new features.

Okay, great. Thank you very much.

You're welcome.

Your next question comes from the line of Ross Seymore. Your line is open.

This is actually Matt Diamond on Ross's behalf. Congrats on the results in this environment. We talked a lot about the internal inventories, but forgive me I didn't get any color on the channel inventories. I am hoping you can give some color there.

Yes, channel inventories are slightly down from the prior quarter. They are roughly around 6.5 week.

Yes. Six and a half weeks.

Excellent. And we heard a lot of the GM from the mix, from a mix point of view, but I'm curious it sounds like InnoSwitch is penetrating the mobile device market really well and it is poised to penetrate on the other end markets too. Curiously about the direction of gross margin for next year given those puts and takes what do you see for the gross margin directionally for next year? I don't want to have you guide. Obviously you're not going to guide, but any sort of directional color for gross margin for 2016 would be helpful.

It is pretty early. We still haven't done our planning. And mix is a hard one to tell. But as Balu talked about that we are expecting LED and high power to come back. Along with that, we believe that our communications business will do very well with the InnoSwitch business. So directionally I think for modeling purposes at this point in time I would say gross margin next year would be somewhere in the 51% to 52% range.

Excellent. Thanks very much.

(Operator Instructions). Your next question comes from it line of Steve Smigie. Your line is open.

Great, thank you. I was hoping you could comment a little bit on InnoSwitch in terms of as you mentioned taking it to other markets. Have you seen much adoption outside of the Quick Charge at this point?

Actually we have won two or three designs already. But the big one that I mentioned is the one we won at large appliance manufacturer who has qualified InnoSwitch as a platform for all new designs. And the first one of those designs is going to be a dryer that goes into production in the second half of next year. We think it is just the beginning. There will be a lot more designs coming not only from that particular OEM but also from a number of other OEMs who are as we speak evaluating and designing with the InnoSwitch EP.

Great, thanks. I know you don't really guide two quarters out, but how should we be thinking about March? It seems like you might have some hints at business that might ramp up, excuse me, might have some hints at customers that might ramp down then but on the other hand it is typically a strong quarter for industrial. So curious any thoughts on directionally where March might go?

Historically March has been kind of flat to slightly down quarter relative to Q4, but I really don't believe in historic seasonality anymore. Because if you look at the last few years every year it has been different. It is really hard to predict. But if you want to the historic data I would say it is flat to maybe slightly down.

Okay, great. With regard to the communication is up 30% sequentially can you talk a little bit more about I think you had some wins with a major Korean guy there. Was it more about getting adopted there, or was it some new wins at some Chinese guys what was the driver there.

It is actually all of those customers. We certainly had a strong growth in share at the Korean OEM but also the Chinese OEM where we got design wins they ramped very nicely in Q3. They all ramped to full production volumes on the projects we have won the designs on. That is really what created the significant growth. I must say that it is not only cell phones even though cell phones was the primarily growth driver but we also had the growth in networking products. If you remember we had the weakness in early part of last year and that weakness was overcome the second half, but that continues to growth this year. So we had growth in both cell phones and networking area.

Okay, great. Can you give some thoughts here on what you think a concept will have done revenue wise this year. And you talked about the recovery next year what magnitude of growth are you thinking about?

This year they'll be probably slightly less than last year. If you remember they had a number of headwinds including slowness in China, the currency issues, oil prices being very low and we had issue in Russia and so on and so forth. However all of that are behind us now. I think we have a baseline to grow from. And as I mentioned earlier there are a number of infrastructure projects in China in renewables and transportation we think will help us grow. Renewables overall worldwide should do well especially solar and wind.

Okay. And last question just on computing has been struggle a little bit over the year. It seems like maybe it stabilized. Could that grow again next year, or should we expect that to continue to be a little bit soft?

That's a good question. It all depends upon how the desktops do. You have to remember our exposure is primarily to desktop. We do have some exposure to monitors and printers but it is really primarily desktops. And desktops have done especially poorly over the last two years. Having said that, I think there is a chance for us to grow that revenue with some of our new products like [Linkage B, BSF the hyper products] (Inaudible) and so on. But it is very hard to tell.

Okay. Great. Thanks a lot.

You're welcome.

There are no further questions. At this time I will turn the call back over to Mr. Shiffler.

Thank you. I know there people with one ear on our call and one ear on another call and maybe wishing they had a third ear. So if any one does want to jump back in, we'll pause for just a moment. Do we have any additional questions, Connor?

Another question has come in from the line of Steve Smigie with Raymond James. Your line is open.

Great, thanks. Just on the LED business, I apologize I missed your comment there, did you say it had still been a little bit soft in Q3? And what kind of growth do you think you can get in that in 2016?

So once again as you know we have headwinds there because of the way we repositioned the business. We decided to walk away from the low, real low end of the bulb business. But I think all of that is behind us now. So we think 2016 we should be able to grow that revenue nicely. I should add that there are three new products that will be introducing over the next couple of quarters. That should give us a nice boost in revenue next year.

Okay. And as far as the growth for next year is that just going to be European and North American markets or any chance that China has changed its standards there to require I would call it safer solutions for the power grid?

Well, I think it will be across the board. We have some design wins in India. We have some designs we are working on in China that will be both for internal and external market but just on the higher end of the internal market. Mostly I would say the China designs are for export as they will be going into U.S. and China, sorry, U.S. and Europe.

Okay. Can you give us an update on where rapid charging is in terms of gross margin at this point?

We don't break out gross margin by categories -- by market. But I think we have explained that industrial is our highest margin segment followed by consumer than computer and the lowest margin is communications. And that's one of the reasons why we have had the impact on the gross margin because industrial is up 5% as a percentage of revenue. Sorry. No, industrial is down 5% as a percentage of revenue and communications is up 5% of revenue and since they are the two extremes of gross margin it has had an impact on our gross margin. So directionally that's how far I can go on gross margin for competitive reasons.

Okay. Just one last one on USB Type C can be a potential threat to Quick Charge/Fast Charge whatever you want to call it in terms of we switch over to that cable, does it essentially displace it?

I don't think it is a threat. It is another option for a protocol and I think it is a very attractive option because it brings other advantages. These types of cable can carry much higher current, so in many cases you don't have to increase the voltage at all. Even at 5 volts it can deliver much higher currents like 3 to 5-amps. And on top of that the USB cable provides data communications so you can actually communicate with the charger to tell the charger what to do in terms of power delivery and voltage and current and so on. The other advantage of USB PD as it is called -- PD stands for power delivery that uses a C type cable -- is that you could actually do the charging function in the charger itself leaving quite a bit of the power dissipation in the phone o the tablet. Right now the charging function is on the side of the phone or tablet and actually dissipates some amount of power. And it becomes an increasing challenge when you start putting a lot of the power in to the phone and the tablet that you're burning power in the charging function. By moving the charging function in to the charger you relieve that thermal load so it is very, very attractive. But of course that requires more complexity in the charger which is always good for us going forward.

Okay, great. Thank you.

You're welcome.

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

Hi. This is Evan Wang calling in for Tore again. You mentioned about your backlog being up slightly this quarter. And I would like to ask to see if you can give a little more color about not just about the backlog but also the quarter we're entering now. Could you talk a little bit about what the linearity was like and together with the backlog what that might imply for this coming quarter?

We entered a little earlier but the bookings if you look in the last two or three months have been fairly linear and that's why you have seen why we have guided what we have guided.

What do you think might be drivers for revenue this quarter in the December quarter?

Well, for the December quarter we said we're expecting slight favorability in the mix which we think the high power will be slightly better along with LED, which typically is better in the fourth quarter. And of course, the InnoSwitch is continuing to do well and I believe that will continue to help us.

The other thing is that the Q4 is usually strong for air conditioners which comes in appliances for us. So we think that the mix will be slightly in favor in terms of gross margin in Q4 and that's why we have guided accordingly.

I see. On the top you have InnoSwitch you mentioned because it is still in the early ramp you haven't quite gotten to the yield you like or production is not quite optimal. How long will it take for InnoSwitch to get to that where you see some potential (Inaudible)?

There are a number of things we are doing that we are obviously including the yield and reducing the manufacturing cost which will provide incremental improvements over the next several quarters. But the big improvement in gross margin will come when we introduce the next generation product in the second half of next year which will bring a much more significant cost reduction. And after that we should -- you should not have a drag on the gross margin of the overall Company. And of course, I also should add one of the reasons we have a bigger impact now is because we are really focused on rapid charging market which is all in communications. Once we start getting designs outside of that in industrial applications, consumer applications and computing applications the gross margin will balance and therefore we should not have much of an impact once these things happen.

Okay. And on your LED lighting you had made a switch and you had made a decision to exit the low end and maybe focus more on the commercial/industrial if I'm correct there. Could you talk a little bit about how well you are doing there and which specific areas are you seeing more traction and when do you see the switch over to complete?

Sure. Just to be clear, we have decided to walk away from the low end of the bulb market. We are still playing in the high end of the bulb market which requires features like lifetime, the power factor correction, dimming and so on. So we will still be in the lighting business even the residential lighting business but it will be for the higher end of that which will be primarily for U.S. and Europe. Although we have won a number of designs in India and some local designs in China. Then beyond that we will be focusing on commercial markets. This is commercial tube lights for office environments. And also industrial market like bay lighting, traffic lights, street lights, emergency lighting, signage and son on and so forth. And we have a pretty high share of street lighting in India for example. We have something like 70%, 80% share of all street lighting in India. So we have a kind of a broad range of applications. The only area we have decided to walk away from is the very low end.

Thank you for that clarification. That's all my questions. Thanks.

You're welcome.

There are no further questions. At this time I will turn the call back over to Mr. Shiffler.

All right. Thank you. We'll leave it. Thanks everyone for listening on this busy afternoon. There will be a replay of this call available on our website which is investors.power.com. Thanks again for listening.

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