Monolithic Power System Inc (MPWR) — Q4 2017 Earnings Call Transcript

Thank you very much. Good afternoon and welcome to the fourth quarter and fiscal year 2017 Monolithic Power Systems conference call. Michael Hsing, CEO and founder of MPS is with me on today's call. In the course of today's conference call, we will make forward-looking statements and projections that involve risks and uncertainty, which could 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 could cause actual results to differ are identified in Safe Harbor statements contained in the Q4 earnings release and in our SEC filings, including our Form 10-K filed on March 1, 2017, and Form 10-Q filed on November 6, 2017, both of which are accessible through our website, www.monolithicpower.com. MPS assumes no obligation to update the information provided on today's call. We will be discussing gross margin, operating expense, R&D and SG&A expense, operating income, interest and other income, pre-tax income, net income, and earnings on both the GAAP and 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. A table that outlines the reconciliation between the non-GAAP financial measures to GAAP financial measures is included in our earnings release, which we have filed with the SEC. I would refer investors to the Q1 through Q4 releases for both 2016 and 2017, as well as to the reconciling tables that are 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 for replay on our website for one year, along with the earnings release filed with the SEC earlier today. Continuing with our now five-year trend, we are pleased to announce that 2017 marks another record year for revenue. Full year revenue of $470.9 million was up 21.2% from 2016. The year-over-year growth was nearly double that of the analog semiconductor industry, which SIA estimates grew 10.9% over the prior year. Looking at our 2017 over 2016, revenue growth by market segments, automotive revenue was up 58.7%, computing and storage up 25.1%, consumer up 23.4% and industrial revenue up 12.9%, while communications revenue was essentially flat between years. Let me speak to highlights by market segment. Full year automotive revenue grew $19.9 million to $53.9 million in 2017. This growth primarily represented increased sales of infotainment, safety, and connectivity application products. Automotive is MPS's largest SAM opportunity at $6 billion, and we are in the early stages of penetrating this market. In the years ahead, we plan to offer a number of new products with application in infotainment, body controls, lighting, EV batteries, and ADAS. Automotive revenue represented 11.4% of MPS's full year 2017 revenue compared with 8.7% for 2016. Compute and storage revenue grew $20.2 million to $100.8 million in 2017. This growth reflected strong sales growth for cloud computing, SSD storage, and high-end notebooks. Compute and storage revenue represented 21.4% of MPS's total revenue in 2017. Consumer revenue grew $36.0 million to $189.8 million in 2017. This growth reflected gains in gaming and high-value consumer markets, including home appliances and battery management systems. Consumer revenue represented 40.3% of MPS's full year 2017 revenue. Industrial revenue grew $7.2 million to $62.9 million in 2017. This growth reflected sales for applications and power sources, point of sales systems, and industrial meters. Industrial revenue represented 13.4% of MPS's full year 2017 revenue. Turning back to our overall financial performance. On a GAAP basis, full year 2017 gross margin of 54.8% expanded 50 basis points from the prior year. GAAP pre-tax income grew 44.8% over 2016 to $82.9 million. On a per share basis, GAAP net earnings of $1.50 were 19% higher than in 2016. The enactment of the Tax Cuts and Jobs Act of 2017 resulted in a one-time GAAP tax expense of $13.5 million or $0.31 per share. This new tax legislation also allows MPS to repatriate foreign-sourced earnings. The one-time charge increased our 2017 tax rate from 5.1% to 21.4%. On a non-GAAP basis, full year gross margin of 55.6% expanded 40 basis points from the prior year. Non-GAAP pretax income of $137.9 million grew 32.4% over 2016. MPS achieved record full year non-GAAP earnings of $2.93 per share, which was 27.4% higher than in 2016. Switching to Q4. MPS had a record fourth quarter with revenue of $129.4 million, 24.9% higher than the comparable quarter in 2016 and slightly higher than revenue generated in the prior quarter. Looking at our 2017 over 2016 fourth quarter revenue growth by market segment, automotive was up 57.7%, consumer up 44.6%, compute and storage up 14.0%, and industrial up 6.7%. Fourth quarter revenue for the communication segment fell 7.0% from the prior-year period. Fourth quarter GAAP gross margin was 55.0%, matching the prior quarter of 2017 and 50 basis points higher than the fourth quarter of 2016. Our GAAP pre-tax income was $26.7 million compared to the $25.1 million reported in the prior quarter of 2017 and $18.4 million reported in the fourth quarter of 2016. For the fourth quarter of 2017, non-GAAP gross margin was 55.7%, matching the prior quarter of 2017 and 30 basis points higher than the fourth quarter from a year ago. Our non-GAAP pre-tax income was $39.2 million compared to the $39.5 million reported in the prior quarter and the $29.7 million reported in the fourth quarter of 2016. Let's review our operating expenses. Our GAAP operating expenses were $46.1 million in the fourth quarter compared with $47.0 million in the third quarter of 2017. On a non-GAAP basis, fourth quarter 2017 operating expenses were $33.9 million, $1 million up from the $32.9 million expense in the third quarter, primarily reflecting an increase in R&D and new product spending. Fourth quarter 2017 operating expenses were up $5.5 million from the $28.4 million reported in the fourth quarter of 2016. From both the GAAP and non-GAAP basis, fourth quarter litigation expenses were $340,000. The difference between non-GAAP operating expenses and GAAP operating expenses for the quarter discussed here are stock compensation expenses and expenses from an unfunded deferred compensation plan. Stock comp expense was $11.9 million in the fourth quarter of 2017 compared with $14.0 million in the prior quarter of 2017 and $10.7 million in the fourth quarter of 2016. Switching to the bottom line. Q4 GAAP net income was $12.1 million or $0.27 per fully diluted share compared with $0.54 per share in the previous quarter of 2017 and $0.39 per share in the fourth quarter of 2016. The current quarter GAAP results included the one-time expense of $13.5 million or $0.31 per fully diluted share resulting from the newly passed tax legislation. Q4 non-GAAP net income was $36.3 million or $0.82 per fully diluted share compared with $0.84 per share in the previous quarter of 2017 and $0.65 per share in the fourth quarter of 2016. Now let's look at the balance sheet. Cash, cash equivalents, and investments were $304.3 million at the end of the fourth quarter of 2017, $620,000 less than the prior quarter of 2017. For Q4 2017, operating cash flow was $53.4 million, and for the full year 2017, MPS generated operating cash flow of about $133.8 million. Cash proceeds from employee stock option exercises and the ESPP were $20,000 in Q4 and $2.9 million for all of 2017. Q4 2017 capital equipment purchases were $40.7 million, and for the full year, were $65.8 million. Dividend payments were $8.7 million for the quarter and $33.9 million for the year. Fourth quarter accounts receivable was $38.0 million or 27 days of sales outstanding, which was lower than the 36 days we reported at the end of the prior quarter of 2017. This decrease was due to a higher proportion of the quarter sales being recorded in the first two months of Q4 compared with the prior quarter. Fourth quarter of 2017 day sales outstanding were three days lower than the 30 days in the fourth quarter of 2016. Our internal inventories at the end of the fourth quarter of 2017 were $99.3 million, down slightly from the $99.9 million at the end of the prior quarter. Days of inventory decreased from 156 days at the end of Q3 2017 to 155 days at the end of Q4. I would now like to turn to our outlook. First and foremost, MPS is announcing a 50% increase in our quarterly dividend from $0.20 per share to $0.30 per share for shareholders of record as of March 30, 2018. During the next year, MPS will look for future opportunities to return value to our shareholders. As of January 1, 2018, MPS adopted ASC 606. This new accounting standard modifies the revenue recognition rule and will have a minimal impact on our Q1 revenue. Looking at Q1, we are forecasting revenue in the range of $122 million to $128 million. We also expect the following: GAAP gross margin in the range of 54.8% to 55.8%; non-GAAP gross margin in the range of 55.3% to 56.3%; total stock-based compensation expense of $13.9 million to $15.9 million, including approximately $400,000 that will be charged to cost of goods sold; litigation expenses of $250,000 to $350,000; non-GAAP R&D and SG&A expenses to be in the range of $32.1 million to $35.1 million. This estimate excludes stock compensation and litigation expenses. Other income of $600,000 to $700,000 before foreign exchange gains or losses. Fully diluted shares to be in the range of 43.9 to 44.9 million shares. Our tax rate for 2018 is expected to be between 5% and 10% on both a GAAP and a non-GAAP basis. In conclusion, we continue to grow and continue to enhance shareholder value. I'll now open the microphone for questions.

Hi, Michael, hi, Bernie. Congratulations on another record and nice to see the 50% increase in dividend. Michael and Bernie, just a couple of questions. First on the compute business quarter-on-quarter, it looks like it was down sequentially despite the ramp of Purley. I wonder if you could give us an update on the Purley ramp and superpower management for you guys? And then, Bernie, it looks like CapEx was up significantly in the fourth quarter; can you give a little bit of detail on what you were spending that CapEx on?

Sure. Let me start with your first question as far as what we're observing in computing and storage from Q3 to Q4. So interestingly, we had a very good continuation of growth in our cloud computing, which is supposed to be associated with the server business, and that was offset by declines in both storage and notebooks. So I think that versus our expectation internally as far as what the opportunity for servers are, we are tracking at or in fact, a little bit ahead of what we expected. The business we had to date has been primarily in some of the lower dollar categories, and we expect to see our QSMod side of the business, which is higher dollars, to pick up early in 2018. With regard to the CapEx spending, we've made some purchases of office space in the quarter, and we picked up two offices, one for $25 million and the other for $15 million. We believe that this is a good way to secure capacity at a fixed price that will benefit and be accretive to earnings over the years to come.

Great. And then maybe just one sort of forward-looking question, as you look into 2018, could you size or maybe rank for us what you see as perhaps some of the biggest incremental revenue drivers heading into this year?

Sure. I'm going to address it on a percentage basis. And so the dollars may be a little bit different. But automotive, as I've been saying in the recent past is expected to grow in any quarter-over-quarter between 30% to 60%. And that was consistent with the experience that we had in 2017. The design wins and the visibility that we have in the long-term, we believe that for 2018, 2019, and 2020, automotive growth will remain strong.

The growth on each market segment, if you look at our last two or three years and looking forward in our guidance, it's just plus or minus a few percentage points on each market segment. The trend will be very similar for 2018, 2019, and 2020; we see this as pretty much all set.

Understood. Great. Thank you.

Thank you, Quinn.

Hey, guys. This is John for Will. Thanks for taking my question. Nice quarter. I'm just wondering if you guys had an update on the web-based e-commerce analog for the masses project.

Well, I see it's delayed again. I promised it in January, and it didn't happen. I think that we would rather have a very good user experience to launch it first rather than a mediocre one. And so I made a very hard decision not to do it and not to launch it. You will probably see it in Q2.

Okay. And thank you for that.

Just to add to that, I think Michael has a lot of credibility typically when you look at the results we turned in for 2017 and going forward. And that secondary point is...

Well, this is one area I messed up.

We will manage that in the transcript. The expectations set as far as zero revenue generation as a result of e-commerce in 2018 and 2019. So to the extent that we have a successful launch and we're able to incorporate customer feedback into making quick adaptations of that platform, I think it's time well spent.

Very helpful.

But on the other hand, I do emphasize that the direction we're really going.

Yeah.

And that doesn't cause any doubt. In fact, all the testing can be done without the website, and it's doing really, really well. In the last few months, every month we increase 600 to 700 customers, and those customers come over and try some products without any marketing.

That's right. Yeah. So the trend - I mean, I can't imagine with our own website and these acquired customers from our distributors and from other sites. I can’t imagine from our own site, the marketing, and all other efforts we put in leading to phenomenal growth.

It's really helpful detail. Thank you. Just as a follow-up, if you could give me any update on customer order patterns, are you getting any sense for double ordering given the strength of the revenue growth?

Yes, it's a concern that we had going into Q4 because we had a very high level of backlog compared to what historical norms have been. And going into Q1 that has remained on the high side, and what we're very conscious of is that we don't want to either participate in double ordering, or where we're selling demand with inventories just going to sit in the channel. And as a result, we've been very cautious as far as meeting customer demands that we believe are in excess of what they need to keep their facilities going. So by the end of Q4, I think we did a very good job because we were able to generate the revenue we did and that increased the days in the channel.

Very helpful. Thanks, guys.

Thanks for letting me ask a question. This is Jeriel Ong on behalf of Ross. So just wondering to get some clarity on the tax rate. It appears that the semi-industry you reported so far currently pays a higher tax than you, and you reported an increase in their tax ongoing tax rate going forward. So with your 7.5% rate, it appears you guys are guiding to a rate that is flat, I assume on an ongoing basis. Could you walk me through how you derived your tax guidance?

Well, you look at our outlook and thanks for our last year's effort; we bought a lot of buildings. These are tax-free.

So let me try and clarify that. So there are two components to the tax, the transition toll tax, which was recorded in Q4. That's what Michael is referring to. Because we've invested in a lot of properties, we actually had a lower blended tax rate that we had to pay there. Going forward, as far as how we guide to the 5% to 10% rate, there is a step up as far as the GILTI tax, but we have some discrete items that can offset that. And so as a result, for 2018, we won't see a change in our tax rate from what we reported in the current year.

Got it. That's really helpful. And I think the next question I guess, switching over to automotive, it was really strong in Q4 and strong in 2017 in general with a north of 50% growth rate; what's driving the strength from various infotainment or lighting, etc. perspective? And do you expect to maintain this rate in 2018?

Yes, it's fair to say that the growth rate will not change much. But don't hold me to exactly what the rate will be. It will be very similar to this year. As for which applications or which segments, I think in the next couple of years we're going to expand a lot more segments. Now the lighting, infotainment, and safety segments, we will have a lot more safety products come out. And as Bernie mentioned in his script, we have ADAS and also battery management, as well as connectivity. These areas currently have very limited revenue, or some of the items have no revenue, only sampling occurring. We expect to see a very high percentage growth in dollar amounts in 2019, '20, and '21.

And one more point is that we've been getting good penetration in all the major geographies known for automotive.

All right. If I could squeeze one last one in just to clarify on the CapEx spend. You mentioned it was office space; so is this more capacity to manufacture goods or is this some office space for workers? I'm trying to...

Well, I think it's everything. It's for the factories and for engineering facilities, for automotive, quality control systems, and everything.

And down the road, software as well. Software design.

All right. Thank you.

Thank you.

Thank you.

Hi. This is actually Jerome calling in for Tore. Let me add my congratulations again to you on another great quarter. Just want to follow up briefly on the automotive segment. You mentioned connectivity; can you give us a little bit more detail on what this piece is? Is it USB tech stuff or is it serial tech stuff?

Michael, Connectivity?

Yes, okay, sorry. The connectivity for the car includes a lot of ADAS and safety features such as cameras, LIDAR, and these will be connected to the cloud. Those are the areas we are really focused on, and those are our customers' requirements.

So it's more about car-to-infrastructure cloud connectivity versus in-car connectivity systems?

Actually both. It's connectivity between all the sensors to the control units, and the control units to the cloud, and all of these contribute to self-learning capability. That's an area we are really focused on, and that's where we consistently receive sizeable requirements that lead to joint development with these larger automotive companies.

Great. That's very helpful. Second question, in terms of your industrial market, can you give us an update in terms of how E-Motion is doing and how you are penetrating that and also with medical?

Yes, E-Motion - it's not emotion, that's past, and I've had a lot of people ask me about it. The product is actually doing really well. This year, we will generate somewhere between $8 million to $12 million in business. We are developing newer fully integrated modules, and we are receiving more requests than I could have anticipated. Those will do well in 2018 and 2019 particularly.

Great. And just one question more on the longer-term outlook. You've done very well leveraging your DC/DC process, expanding into multiple markets and applications. Looking out three to five-plus years, can you still ride that, or do you intend to invest in maybe adjacent processes or new opportunities?

Well, that's a good question. As we said in the last conference call, we will move - we started the two 12-inch wafer fabs. So we migrate from a 6-inch, 8-inch to now the 12-inch. With each upgrade, we add a lot more new features. So you can think about it - now we can integrate microcontrollers and it's not inconceivable that we even put a Wi-Fi system on it.

Thanks for letting me ask a follow-up question, guys. Just on 2018, given that you are guiding for 25% growth in Q1, and considering the multiple growth drivers you have coming on Purley, gaming, and notebooks, is there any reason we shouldn't think that calendar 2018 can grow in the low 20% range year-over-year?

We don't offer a specific guidance beyond one quarter. But the way I can respond to it is that we've been promoting our strategic business model for the last four years. If you look at 2017, we had revenue growth of 20%, which was a little better than our model. We had gross margin increase of 40 basis points for the full year, which is consistent with our model. Our operating expenses came in between 50% and 60% of what our revenue growth was. I think what we've done is we've achieved the model and expect to continue along that line. One thing to offer some concern is that there are risk factors associated with introducing new products to new customers and particularly in what is becoming a more clouded longer-term outlook for the economy. We've tended to believe that we're capable of achieving our model, but I would add just a cautionary note that there are risk factors, so you might build in a little bit of cushion when looking at the full-year outlook.

Got it. Understood.

Let me comment on your question. In early 2005, 2006, we had a model that targeted 20% to 30% growth, but we never achieved it. We got close to 18% or 19% between 15% to 20%. I was criticized by some shareholders for spending too much money and not growing enough. I can't predict the growth will be 20% or not. In 2016, in the first quarter, I made an announcement, and people asked me if we would achieve the models. I said that it would be 2017, and we did it. Now since you ask for this year again, I think as a caveat, while it’s hard to predict by a couple of percentage points, we'll grow double or triple the rate of industrial growth. If industrial growth is negative 5%, then we may grow somewhere in the range of 10% to 15%.

And that's if the industry grows 5%; we will grow 10% to 15%.

Yeah. I got it. Thank you.

Yeah.

And just a housekeeping question; are you guys having an Analyst Day this year?

We are planning on it, but we haven't announced a date yet.

We will plan into it - and because our website is stocked up, okay, we delayed it.

Hi. Thanks for taking my question. Hey, Bernie, last year you came in at the high end of OpEx as a percentage of sales growth. I think I saw you at the high end of the 60% range. What's your sense in terms of how we should be thinking about OpEx growth this year as a percentage of sales? You've got to 50% to 60% model; could we get a little bit more leverage and be at the lower end of the range, or how should we be thinking about that?

When I say the 50% to 60% range, that's really focused on R&D and SG&A, and does not include litigation, which can be a little hard to manage. So for 2017, my calculations show this for the full year being at 58% of our revenue growth rate. When you look ahead, I think we've got three drivers that we're going to invest in. Automotive in particular, we want to continue to fuel that revenue growth through sales and marketing as well as some R&D specific to it. On top of that, Michael mentioned our investment in 12-inch fabs, which is going to be continuing for about five to six quarters beginning in earnest in Q2. Finally, with the launch of the website in the e-commerce platform, we are going to make a big investment in marketing to launch that successfully and get the word out. I don’t have a firm number yet, but we want to strike and make these investments, which will put us at a minimum at the high end of that range.

Yeah, but Bernie is talking about a lot of investments. If you look at our history, we've never been one for wide spending.

Yeah.

So I don't see us going beyond that either for 50% to 60%, maybe 61% or 62%. Shouldn't see wide open pocket spending occurring.

Yeah. Great. And then my follow-up is just on growth questions. I know you are trying to avoid guiding specific numbers for 2018 again, but if I think about the computing segment, you've got uplift and higher ASPs in QSMod and you will get the full year's benefit of the Purley ramp. And then on consumer, you've got a full year's worth ramp for gaming consoles. Is there any reason to think that the growth rates of these two segments could be positively biased, slightly higher in 2018 versus 2017?

I think Michael did a good job responding to that, saying that if you look at the growth profile of 2017 plus or minus a couple of percentage points off of what we enjoyed, that's pretty much what we're expecting for 2018 as well.

Well, it's gaming, and I would rather not openly fit it. It goes up by a lot one quarter, and then next couple of quarters it comes down again. I want to manage very, very smooth and sustainable growth. So since you mention gaming, of course, there's a lot of dollars to be made; these are very opportunistic. That's why we have a few percentage variations.

But on gaming, it's also very important to highlight our commitment to the gaming platforms. However, there are limited opportunities for growth. So we have to ensure that the market understands we are positioned for the long term and can benefit from future design wins to help accelerate that growth.

Great. Thank you.

Yes. Hi. This is Amit Chandra dialing in for David. Thanks for letting me ask a question. Bernie, for the December quarter, could you share with us what percentage of your cash flows are onshore versus offshore? And should we expect the majority of offshore cash to be brought back to the U.S. post-tax reform? What are your priorities for uses of cash in 2018?

So at the end of the year, we had about 40% of our cash onshore and 60% was offshore. We are continuing to evaluate what the impact of the new tax reform means for us. We took an initial step by increasing the dividend this quarter. We're going to use the remainder of this year to consider other opportunities to increase shareholder value, whether through dividends, acquisitions, or perhaps even a stock buyback. But right now, we haven't firmed up any specific plans around that.

Okay. Great. And then as a follow-up, in your high-end notebook business, can you talk about the product cycles you expect better upcoming in 2018 to drive that business higher?

Yeah, I'd say that the notebook business, a lot of that has to do with customer adoption. We have a couple of very good prospects that we've been designed with. We're looking at scenarios regarding timing and unit volumes. One of the things you may be aware of is that Cannon Lake was canceled, and the next opportunity for a new design will be, I believe it's called Whiskey Lake, which is supposed to be mid-2019. I think we feel very well positioned there, with very good new adoptions occurring now, but the product cycle from Intel got moved out by a year.

Well, since you mentioned, the notebook is not my favorite either. These are kind of low-margin, but the way Bernie emphasizes high-value notebook - these generally retail at a price of around $1200 or $1300 and above. Some of those models might pay it. They appreciate our technology, particularly those products.

Okay. And then one final one for me regarding your E-Fuse opportunities; can you talk about that in 2018?

Sure. E-Fuse tends to be lower dollar content, but what has been beneficial for us is the door opening for opportunities that we haven't had otherwise.

Are you talking about the server area or all areas?

Broadly.

Yes, broadly speaking.

The server area is where MPS becomes a single source and is now adopted by some very large customers. Our product is starting to get recognized by all the large first-tier makers. These are not small, lower dollar, but rather very high-margin opportunities, and we are very excited about it overall. The trend is to replace the blowup fuse with an electronic fuse, which is where the MPS opportunity lies.

There is also an opportunity in communication networks as well. That should start to roll out by the end of 2018.

Okay, great. Thank you very much, gentlemen. I appreciate it.

Thank you very much. Thank you for joining us on the conference call, and I look forward to talking to you again during our first-quarter conference call, which is likely to be at the end of April. Thank you, and have a nice day.