Monolithic Power System Inc (MPWR) — Q2 2015 Earnings Call Transcript

Thank you. Good afternoon, and welcome to the second quarter 2015 Monolithic Power Systems conference call. Michael Hsing, CEO and Founder of MPS, is with me on today’s call. Over the course of today’s conference call, we will make future projections and statements that involve risk and uncertainty, which can cause results to differ materially from management’s current views and expectations. Please refer to the Safe Harbor statement contained in the earnings release published today. Risks, uncertainties, and other factors that can cause actual results to differ are identified in the Safe Harbor statements contained in the Q2 earnings release as well as in our SEC filings, including our Form 10-K filed on March 2, 2015, and our Form 10-Q filed on May 6, 2015, which are all accessible through our website, www.monolithicpower.com. MPS assumes no obligation to update the information provided on today’s call. Today we will be discussing gross margin, operating expense, operating income, net income, and earnings on both a GAAP and a non-GAAP basis. These non-GAAP financial measures are not prepared in accordance with GAAP and should not be considered as a substitute for, or superior to, measures of financial performance prepared in accordance with GAAP. Included in our earnings release, which we’ve filed with the SEC, is a table that outlines the reconciliation between the non-GAAP financial measures and GAAP financial measures. Investors should refer to the Q1 and Q2 releases for 2014 and 2015 as well as the reconciling tables posted on our website. I’d also like to remind you that today’s conference call is being webcast live over the Internet and will be available on our website for one year along with the earnings release filed with the SEC earlier today. We’re pleased to report that MPS again delivered record-breaking quarterly revenue of $81.4 million, representing a 19% increase from the second quarter of 2014. This is the 8th consecutive quarter MPS has achieved double-digit year-over-year revenue growth. In addition, MPS’s non-GAAP gross margin expanded 50 basis points year-over-year to 55%. Our non-GAAP operating income of $19.8 million grew 27.6% from our year-ago quarter and our non-GAAP earnings of $0.46 per share grew 24.3% over the second quarter of 2014. The strong organic revenue growth is attributable to efforts initiated four years ago. We have since introduced many groundbreaking products in new markets and consequently we have consistently delivered revenue growth well above the industry average. Four years later, MPS is expanding into a new $1 billion market besides power management. We’re excited to announce that MPS is introducing a revolutionary family of solutions in advanced motion control. We are setting a new milestone for the next phase of MPS’s growth. We will discuss this new development in detail at our next Analyst Day on September 15th. Turning to the financials, our revenue for the second quarter was $81.4 million, which was above the midpoint of our guidance. Compared with the first quarter of 2015, our revenue increased $7.9 million or 10.7%, primarily due to growth in consumer, industrial, and computing markets. Looking at our revenue by end market, fueled by higher demand in the security, smart meter, and automotive markets. Industrial revenue, which represents 19.9% of our revenue, ramped up $2.9 million from the previous quarter. Consumer revenue grew approximately $4.1 million due to increasing demand from our newer high-value market as well as from the markets they are traditionally served. Revenue increased $1.2 million in computing largely due to strength in the cloud computing and high-end PC markets. Communications revenue was relatively flat due to soft demand. Moving on to gross margin, our second quarter non-GAAP gross margin increased to 55% from 54.8% in the prior quarter. On a GAAP basis, our Q2 gross margin was up 54.2% from 54% in the prior quarter, with the only difference between the GAAP and non-GAAP gross margin being stock compensation expense and charges by acquisition-related amortization. Let’s review operating expense. Our non-GAAP operating expenses for the second quarter of 2015 increased approximately $300,000 to $25 million. In the second quarter, GAAP operating expenses were $34 million compared to $33.8 million in the first quarter. The difference between non-GAAP operating expenses and GAAP operating expenses for these quarters is stock compensation expense as well as expense or income on an unfunded deferred compensation plan. Stock compensation was $9.2 million in Q2 compared to $9 million in the prior quarter. Investment income related to the deferred compensation plan of approximately $100,000 in decreasing Q2 GAAP operating expenses. In the prior quarter, investment expenses of $200,000 increased GAAP operating expenses. Switching to the bottom line, on a non-GAAP basis, our Q2 net income was $18.8 million or $0.46 per fully diluted share. This result is computed with an estimated tax rate of 7.5%. Q2 2015 GAAP net income was $7.9 million or $0.19 per fully diluted share. During Q2, MPS resolved the tax issues arising from the IRS audit of the 2005 to 2007 tax years. We recorded a net one-time charge of $1.6 million for tax and $1.1 million in interest related to prior years. Now, let’s look at the balance sheet. Cash, cash equivalents, and investments were $236.4 million at the end of the second quarter of 2015, slightly below the $239.2 million at the end of the prior quarter. This reduction in cash was attributable primarily to the $7.7 million we spent to purchase 148,000 shares under our stock buyback program; payments of an $8 million quarterly dividend and $1.1 million of capital equipment purchases. In Q2, MPS generated operating cash flow of about $8.7 million. Another $5.4 million was contributed from cash proceeds resulting from the exercise of employee stock options. Accounts receivable ended the second quarter at $26.8 million, up from the $25.3 million at the end of the prior quarter. Days of sales outstanding were 30 days in Q2, one day less than the 31 days reported in Q1 2015. Our internal inventories at the end of the second quarter were $65 million, compared with the $53.4 million at the end of the prior quarter. Days of inventory increased from 144 days at the end of Q1 to 159 days at the end of Q2. Days of inventory in the distributed channel decreased from the prior quarter. I would now like to turn to outlook for the third quarter of 2015. We’re expecting yet another quarter of record revenue. We are forecasting Q3 revenue in the range of $89 million to $93 million. At the midpoint of the guidance, we are projecting approximately 11.8% growth from the prior quarter. We also expect the following: Non-GAAP gross margin in the range of 54.6% to 55.6%. GAAP gross margin in the range of 53.9% to 54.9%. Total stock-based compensation expense of $9.1 million to $9.7 million, including approximately $300,000 that would be charged to cost of goods. Litigation expenses of $100,000 to $400,000. Non-GAAP, R&D and SG&A expense in the range of $25.8 million to $26.8 million. This estimate excludes stock compensation and litigation expenses. Other income of $200,000 to $300,000 before foreign exchange gains or losses. Fully diluted shares in the range of 40.8 million and 41.8 million shares before share buyback. In conclusion, MPS continues to deliver. As a reminder, we’re hosting our September 15th Analyst Day at our San Jose headquarters. We look forward to sharing our vision of the future at that time. I'll now open the microphone for questions.

A few questions. First of all, just given what’s happening out there in the overall environment, could you just talk about your relative visibility going into the September quarter? Obviously, there are a lot of share gains going on here, but just sort of how are your customers feeling right now, typically at this time of the year?

If you're asking about the softness that some of our peers have talked about, we’re seeing some softness in a market, but what we’re also seeing are some of our growth drivers and we’re also seeing new opportunities. All this together with our usual conservatism colors how we look at the quarter.

As you said, the growth is really from share gain. To be more precise, all the gain is from the new segment that we entered in, which wasn't there a few years ago. So, the opportunity for us is great. That’s why we see the growth, and then we see the growth for the next few quarters.

And your inventory days picked up a little bit again, I'm just wondering what’s behind that? Is it basically getting ready for this quarter's demand, or is it the beginning of the transition to new foundries? Just trying to understand what’s going on there please. Thanks.

It’s a combination. Some of it was in support of the higher shipment this quarter and also in support of customers' demand and strategic inventory build. Some of it is also we need to hold additional inventory until we get another foundry up and running. So, it's a combination of those factors.

Let me answer a little more or give a little more color. I’m never concerned about MPS's days of inventories because first, in the history of MPS, we never have any large amount of write-off. Because MPS is a product that lasts six years to eight years. So, historically we never have a material amount that stays there, and we have a very small amount of write-offs due to engineering issues leading to a technical issue. The reason you see the inventory is, overall in the history, our inventory fluctuation is because, firstly, we have a lot of engineering lots ready to take off and other customers are waiting, and the other reasons are, of course, the demand and thirdly, depend on our pricing. We use the pricing to book more materials if it’s favorable; we’ll book more, if it’s less favorable, we’ll book less. So, these are the reasons that are driving the MPS inventory. I provide this long answer because I keep hearing our investors ask about MPS's inventory, so I thought I would clarify once and for all what drives MPS's inventory.

That’s very helpful, Michael. Just one last question, and I know this is going to be a highlight here in about six weeks. But could you just give us a little bit of sneak peek on your advanced motion control new business unit? Just maybe a little bit more information, please?

We’re moving to a new era. MPS has always related to some kind of power, this one still relates to power but more in motion controls. We are introducing a family that is really software-driven, making it much easier for our customers to implement motion control in applications like robotics. They can really ease their design activity. This is not only for robotics; anything motion-related including automotive will benefit from it, making it much easier for them to design. So we’re going to talk about it in Analyst Day.

Just a few quick ones, so if I could just clarify, I think what I am hearing you say is, one of the reasons for the inventory is up is that in bad environments like this, you guys can usually get pretty great pricing on wafer, and so you take advantage of that to lock in some lower costs. Is that one of the reasons?

No, the reason we're not disclosing, there are reasons that either our demand is high or second, we have a lot of new products launching, and the third, we may have high inventories because of favorable pricing. We’re not disclosing any of the reasons.

Michael was just saying, historically, the reasons why we have held higher inventory include all the factors. So, favorable wafer pricing is not necessarily the reason why we are doing it now, so that’s the takeaway.

And then on the advanced motion control, you mentioned automotive, would that be for stuff like power braking, power steering? And could you also see that used in applications like air conditioning and other wide goods where you might have a pump or fans, something like that?

Exactly. Even in a car, anything that moves, like the car seat, wipers, mirrors, and everything that moves, the brakes, can all use MPS products. It’s much easier to use. We really provide a new platform. And in addition, in AC applications, anything related to precise measurements will be replaced by MPS products instead of many mechanical parts.

Your auto-industrial category was pretty healthy there. Can you talk a little bit about what some of your bigger buckets are in auto right now?

We have four buckets in industrial that are big for us: automotive being the strongest, and the other three are smart meters, security, and power sources.

But you're not very strong in say, like, LED lighting in auto or some other areas that we should be thinking about that you guys are dominating right now?

So, LED lighting, we include a small portion which goes to industrial and commercial in our Industrial segment. The rest of it that goes for incandescent bulk replacement is included in the Consumer segment.

I think Steve is asking for all of our business.

Within the auto business.

I think within the auto business, LED is strong. We have a lot of shipments and design activities; the current shipment is mainly in LED and also in body automotive that has nothing under the hood. It’s more about body, with a lot of DC to DC products.

You guys have done extremely well here on the quarter and the guide relative to other folks, but as we look out to December, that’s typically a seasonally soft quarter for you. Is it fair to think that you would experience the pro-seasonal softness into December?

We’re not usually talking about others in the next two quarters of our guidance, but I can tell you there is a large significant portion of the business that we’re still very much affected by the macroeconomic condition. But overall, the new business segment will grow very strongly.

We do know that we’ll have some seasonal weakness in Q4 in consumer and consumer-related markets, and we have our growth drivers. The elements we cannot predict particularly this far ahead are what the macro conditions will be in Q4. And as Michael said, we’re not immune.

I am excited if we can have year-over-year growth in four quarters; it has never happened. I hope it happens, but I wish this year.

I had one big picture question and then something more specific. Michael, obviously you’ve been very excited about this motion control market since the acquisition of that small company. But I mean the end markets and applications that you're talking about, when you add them up, we’re talking about billions of dollars. So, is it fair to say that the addressable market is what, $4 billion to $5 billion for you guys, or are we talking about a very small specific market? And when would revenue start coming in from these product lines?

I’ll answer your last question first. The revenue comes in now. It’s happening; it’s already shipping. But that’s based on the products we acquired from FEMA. We are already generating revenue from those products. It’s not a small revenue; it's a meaningful contribution to our revenue. To answer the other part about how large the market segments are, it's certainly well over several billion, not just over 1 billion or 2 billion. Whether it’s $4 billion to $5 billion, we don’t know yet. That’s because the end market is growing very rapidly; and from the Internet of Things, as people now connect everything to their phone, the next explosion of the domain is when you require automatic controls. There are many small companies doing these kinds of things. This product is perfect for them as it provides a platform for that kind of implementation.

Now Michael, I mean clearly you’re very bullish, and I think from day one you were very bullish about this very promising product line. So, why shouldn’t I think of this segment being the next $500 million revenue stream? I mean this should happen very quickly given that no one is there. Obviously, there are going to be some switching costs, but if you’re talking about these applications in the end market and it’s going to be as you described, this could itself power the company to double revenues from where they are today, right?

Absolutely. The limiting factor is our sales and marketing. Now, it’s all possible. I think the $500 million target is quite achievable, and I see much bigger growth than that.

And finally, Michael, you talked a little bit about pricing power. Can you help us understand what position Monolithic Power is in today, given that the modules are finally kicking in with some of these end markets such as automotive and industrial? How is that affecting the overall pricing environment from your point of view? Is it significantly better than historical levels, or is it getting offset by consumer? And how should we be looking at your pricing power?

Our pricing power as a solution provider enables us to charge more. In the last four-five years, our level of integrations and having software has really enhanced our pricing power. Even in the consumer market segments, we’re doing really well. Our customers appreciate the easily usable products.

Michael, you mentioned before that market share gains were really the driver to allow Monolithic Power to offset what’s going on in the macro. Can you talk a little bit, either you or Meera, about where you think those market share gains by end markets are the most apparent for this year and maybe into next year? And then I guess as a follow on for Meera on that, for the side of the business that you are seeing the weakness on, what are you doing to encapsulate some conservatism into your model and into your guidance, given what we’ve heard from everyone else?

Let me answer the first. Of course, I am talking about motion controls, and I’m all excited about motion control. That’s in the future, and Meera can talk about what has been growing for the last few quarters.

The areas where we see growth this year are some of the same markets we’ve been talking about. We are seeing growth in our industrial markets, and we expect to continue to see that. Consumer again is our newer market to a large extent, the high-value market opportunity that we talk about, where we are seeing strength. And computing, when it comes to computing, it’s both storage and cloud computing where we are seeing the strength. So, on top of all this, as you roll on into next year, we are in the early innings of modules, for example. We expect to get a few million dollars this year. But as we go into next year and the year after, we expect to see a lot more revenue there. So that answers the question of where we are seeing growth. And in terms of where we are seeing some of the weakness, we’re seeing pockets of weakness in areas like our gateway communications business. We’re seeing some softness in more traditional consumer markets, so we have factored that into our guidance. As you know, we have a track record of hitting our guidance. We put a lot of thought and effort into making sure that we are comfortable with the numbers that we guide to the street.

Great. That’s perfect. I guess as my one follow up, on the OpEx side of the equation, you’ve talked about that being elevated for some period of time as you bring up your fourth foundry. Can you just give us a rough idea of how much of your current spend is targeted towards that? And is that something that’s a permanent step-up and then you grow into it as that foundry ramps, or is it something that’s temporary and then will fall off after a period of time?

Well, currently we’ve started some of the work on bringing the foundry from the standpoint of mass production, etc. But this quarter we just had a small portion of it in Q2. We’re going to see more of a stepped-up cost in Q3, Q4 going into the first half of next year. The rough estimate is that between these four quarters, we’ll expand something, maybe just a little under $3 million on this mass production. The rest of the increase this quarter is obviously for some of the sales and marketing that we need, the people we need to hire in support of growth in newer markets.

Let me talk about OpEx; I don’t imply that MPS will grow tremendously in OpEx. Look at the history, we always grow less than revenue growth. Some years ago, it goes up a little bit higher than others. If you look at the last four years, how we expect the next four years will be at similar levels, plus/minus. But overall, I said earlier, MPS growth is limited by our sales and marketing. The reason I said I can elaborate a little more is because four years ago we tried to enter this new market segment. We were knocking on the door for about two years. Then four years later, we see the door open; we’re in it, and we see a lot more opportunity for growth. But we still want to grow very manageably within the same pattern as in the last four years.

You guys continue to do great, just in general. I think compared to some others in your peer group, I guess I'm trying to quantify great. I mean for instance, if you talk about automotive, I think automotive revenues potentially doubling annually for you guys over the next few years, which would give us line of sight to that automotive business being something like a $100 million business in the next three or four years potentially. Are there other opportunities out there? I'm guessing that e-motion could be another one of those categories. But are there opportunities like automotive that you can lay out for us so we can kind of get a sense of some of these bigger pieces of the pie and how they’re going to ramp over the next, let’s just say three or four years?

I think as the e-motion is across the board, that and also some of the new emerging market segments are big enough. For all our business that you said $100 million, I don’t know about $100 million, but in the last few years we've grown 100%; we doubled every year because we’re small. Growing next couple of years, I don’t know if we can still double, that will be a lot more difficult. But e-motion is limitless.

Since you mentioned it, how far out is it, if you want to call it the tipping point? But how far out is that business from sort of hitting that tipping point? Is it maybe around 10% revenue kind of driver?

I think on the consumer side, like drones, we think revenue will increase very quickly. I see a lot of emerging markets like robotics and artificial intelligence, which are driven by artificial intelligence and they are all emerging. I truly believe they will become more and more critical. For 10% of MPS revenues, MPS is also growing, and I think that as we go into the next three or four years, we’re going to see that we’d be more than 10% of MPS revenue.

Got it. And if I could just ask one last one, just on the v-core. We’ve talked about the v-core ramp in the second half for you guys; how much does this v-core content really go up with Skylake in your eyes? And how big can this business be for you guys here in the second half and that’s it. Thanks.

For the Skylake, that's mainly in the notebook business. While Skylake is more interesting than the cycles that have come before, we still tend to view this more opportunistically because the strategic focus continues to be on servers. We do believe that this is going to be a stronger cycle and will only play in the high end of the PC business.

Thanks very much. Can you give us some idea of where the growth in consumer is coming from? This is one of your biggest divisions which has been growing at 20% plus year-over-year. So, have you gone into some new segments? Do you have new products in particular applications? What is the biggest driver in this segment?

So, these are our four new markets that we have entered in the last few years that we call our high-value market segments, and that's where we are seeing most of our growth coming from. Just to remind you, these are home appliances, battery management, LED lighting, as well as gaming. So, these are the four markets that we are seeing most of our growth in consumer.

Thank you for taking my question, and congratulations as well. You guys just keep surprising the street. So I have one puzzle in my mind, and that given the strong growth in the top line, as well as from the street growth most and also Michael, you mentioned that you are now at favorable pricing some foundries. So, it seems like gross margin expansion is kind of not as expected.

Let me clarify first. We have not increased inventory; it's not because we have favorable pricing. I didn’t say that.

Yeah, I know.

That has historically been one of the reasons in some of the prior growth, not this one. So just to make that clear.

Alright.

I understand. Thanks for the clarification. But if you look at your top line growth, it is very strong, especially in this kind of tough market environment, and you look at industry growth with almost 30% growth year-over-year in the last six quarters. So my puzzle is, it seems gross margin expansion is kind of behind these two strong growths. Can you help me identify the factors that determine your gross margin?

It's very simple. As we have said before, as we see more and more revenue come from higher margin opportunities, we also take on more of the lower margin revenue. This is in markets like, some of our traditional consumer market or it could be in the gateway business in communications, or sometimes even in notebooks. These opportunities, as we generate more of the higher margin revenue, we do take that. So, the idea is, if you look at our long-term model, our gross margin is well within that at the 55% level, and so we actually optimize our top line and bottom line more, at the same time showing a steady expansion in gross margin. We have always talked about gross margin expansion as a steady growth; it's not a leap.

Okay, thanks. And also in terms of your new product line motion control, and Mike did mention that down the road it will be above 10% of total revenue. Should we expect you will give us a breakdown when it reaches a certain amount of revenue?

When it reaches a material amount of revenue, we would most probably consider breaking it out, but we are not at that point yet.

Okay. Thank you. Best of luck.

Thank you.

Thank you.

Thank you, Candus. I would like to welcome you all to come and attend our Analyst Day that’s going to be on September 15th at our headquarters in San Jose. It will be at 9:00 AM California time or noon East Coast time, and we’d love to have you all come and attend. We can share with you how MPS is going to grow in the years to come. Thank you. Bye-bye.