Monolithic Power System Inc (MPWR) — Q4 2018 Earnings Call Transcript

Good afternoon and welcome to the fourth quarter 2018 Monolithic Power Systems' conference call. In the course of today's conference call, we will make forward-looking statements and projections that involve risk 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 the Safe Harbor statements contained in the Q4 earnings release and in our SEC filings including our Form 10-K filed on March 1, 2018, and Form 10-Q filed on November 2, 2018, 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'll be discussing gross margin, operating expense, R&D and SG&A expense, operating income, interest and other income, net income and earnings on both a GAAP and on 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. 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 Q4 2017, Q3 2018 and Q4 2018 earnings releases, 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. I'd like to begin today's comments with the two highlights of what was a very successful year for MPS. For the full year 2018, MPS achieved record revenue of $582.4 million, 23.7% higher than revenue from 2017. A $111 million increase in year-over-year revenue was the largest annual gain in the company's history. The 23.7% annual increase was the highest growth rate for MPS since the company redirected its focus in 2010 to the industrial, cloud computing, automotive and high-end consumer markets. Although we cannot escape the current macroeconomic conditions, we see momentum in these segments continuing strong for the next several years. This was the sixth consecutive year of double-digit growth. 2018 was a significant year for MPS. On the technology front, we widened our lead with BCD 5 solidly in volume production and with the development of BCD 6, a 55 nanometer process designed on a 12 inch wafer. Both of these advancements will significantly increase our product functionality, improve energy efficiency, reduce our solution size, ease our customers' adoption efforts, and keep our product cost competitive. In addition, we were increasing production capacity both in 12 inch and 8 inch wafer in anticipation of future revenue growth. On the customer front, MPS penetrated a number of new Tier 1 companies in the automotive and cloud server markets, generating initial and meaningful revenue. More importantly, we are co-developing next generation products with a number of these Tier 1 companies that will revolutionize their industries. We expect these partnerships to drive substantial technological advancements and represent an important source of MPS's future revenue growth. A few examples include developing specific leading-edge system solutions using QSMod technologies for GPU-based artificial intelligence and machine learning applications, using MPS's 48 volt QSMod Technology for both cloud-based and automotive applications, working with automotive companies to develop specific solutions for smart driving systems and unique lighting applications with a 2020 target for market introduction. Developing mechanical relay replacements servicing the IoT and automotive markets, using MPS's high current high density process technology for improved reliability in a compact form. We also completed the integration of high current programmable power modules for communication applications such as 5G networks. The target market applications for these modules are base stations and switchers, which require compact and reliable solutions. In addition to these exciting core development projects, 2018 was important as we launched our e-commerce website allowing engineers to design their own customized solutions from their desktop. This catalog of programmable solutions will greatly enhance our customers' time to market, lower their total cost of ownership and optimize the efficiency of their designs. Now let's look at our full year 2018 revenue by market segment compared with 2017. Computing and storage were up 57.9%, automotive up 48.6%, industrial up 40.7% and communications revenue up 11.8%, while consumer revenue was down 3.0%. Full year computing and storage revenue grew $58.3 million to $159.1 million in 2018. This increase primarily reflected strong sales growth for cloud computing, SSD storage, high-end notebooks, and initial GPU power management sales. Computing and storage revenue represented 27.3% of MPS's total revenue in 2018, compared with 21.4% in 2017. Automotive revenue grew $26.2 million to $80.1 million in 2018. This growth primarily represented increased sales of infotainment, safety, and connectivity application products. Automotive represented 13.8% of MPS's full year 2018 revenue compared with 11.4% in 2017. Industrial revenue grew $25.6 million to $88.5 million in 2018. This growth reflected sales for applications in power sources, security, and industrial meters. Industrial revenue represented 15.2% of MPS's full year 2018 revenue compared with 13.4% in 2017. Communications revenue grew $7.0 million to $70.6 million. This improvement was primarily due to higher sales of our legacy home router and wireless gateway products. More importantly, though, we see initial ramping in the 5G market segment. Communications revenue represented 12.1% of our 2018 revenue compared to 13.5% in 2017. Switching to Q4, while we started to see the impact of macroeconomic headwinds in Q4, MPS still had a record fourth quarter with revenue of $153.5 million, 4.0% lower than revenue generated in the third quarter of 2018 but 18.6% higher than the comparable quarter of 2017. By market segment, revenue for industrial grew 66.6% over the same period of 2017. Computing and storage grew 63.2% and automotive grew 40.2%. Communications revenue grew 27.1%, due primarily to increased revenue from MPS's legacy home router and wireless gateway products. Fourth quarter revenue for consumer fell 25.9% from the prior year. MPS experienced continued weakness in high volume consumer-related businesses, with especially soft demand in the Greater China region. In the fourth quarter, MPS continued to see strong design win momentum. However, many customers concerned about the economic outlook and trade policies delayed their production ramps for new products in automotive, computing, and industrial which resulted in a less desirable sales product mix. As a result, fourth quarter 2018 non-GAAP gross margin was 55.6%, 50 basis points lower than the third quarter of 2018 and 10 basis points lower than the fourth quarter of 2017. Our non-GAAP operating income was $46.6 million compared to $49.2 million reported in the prior quarter and $38.2 million reported in the fourth quarter of 2017. Fourth quarter 2018 GAAP gross margin was 55.1%, 50 basis points lower than the third quarter of 2018, but 10 basis points higher than the fourth quarter of 2017. Our GAAP operating income was $33.1 million compared to $33.5 million reported in the third quarter of 2018 and $25.1 million reported in the fourth quarter of 2017. Let's review our operating expenses. Our GAAP operating expenses were $51.5 million in the fourth quarter compared with $55.5 million in the third quarter of 2018 and $46.1 million in the fourth quarter of 2017. Our non-GAAP fourth quarter 2018 operating expenses were $38.7 million, down from the $40.5 million we spent in the third quarter of 2018 and up from the $33.9 million reported in the fourth quarter of 2017. On both the GAAP and non-GAAP basis, fourth quarter litigation expenses were $409,000 compared with $343,000 expense in Q3 2018 and a $340,000 expense in Q4 2017. The difference between non-GAAP operating expenses and GAAP operating expenses for the quarters discussed are stock compensation expense and income or loss from an unfunded deferred compensation plan. Total stock compensation expense including $504,000 charged to cost of goods sold for the fourth quarter of 2018 was $14.8 million compared with $14.8 million recorded in the third quarter of 2018. Switching to the bottom line, fourth quarter 2018 GAAP net income was $27.6 million or $0.61 per fully diluted share compared with $0.71 per share in the third quarter of 2018 and $0.27 per share in the fourth quarter of 2017. Q4 non-GAAP net income was $44.6 million or $0.99 per fully diluted share compared with $1.06 per share in the third quarter of 2018 and $0.82 per share in the fourth quarter of 2017. Fully diluted shares outstanding at the end of Q4 2018 were $45.1 million. Now let's look at the balance sheet. Cash, cash equivalents, and investments were $380.5 million at the end of the fourth quarter of 2018 compared to $353.1 million at the end of the third quarter of 2018. For the quarter, MPS generated operating cash flow of about $47.6 million compared with Q3 2018 operating cash flow of $52.2 million. Fourth quarter 2018 capital spending totaled $4.5 million. Accounts receivable ended the fourth quarter of 2018 at $55.2 million or 33 days sales outstanding compared with a $59.9 million or 34 days reported at the end of the third quarter of 2018 and the $38.0 million or 27 days reported in the fourth quarter of 2017. Our internal inventories at the end of the fourth quarter of 2018 were $136.4 million, down slightly from the $136.8 million at the end of the third quarter of 2018. Days of inventory rose to 180 days at the end of Q4 2018 from the 175 days at the end of the third quarter of 2018. I would now like to turn to the outlook. First, MPS is announcing a 33% increase in our quarterly dividend to $0.40 per share from $0.30 per share for shareholders of record as of March 29, 2019. We are forecasting Q1 2019 revenue in the range of $138 million to $144 million. We also expect the following: GAAP gross margin in the range of 54.8% to 55.4%, non-GAAP gross margin in the range of 55.3% to 55.9%, total stock-based compensation expense of $17.6 million to $19.6 million, including approximately $600,000 that would be charged to cost of goods sold; GAAP R&D and SG&A expenses between $55 million and $59 million. Non-GAAP R&D and SG&A expense to be in the range of $38 million to $40 million. This estimate excludes stock compensation and litigation expenses. Our other income is expected to be in the range of $1.4 million to $1.6 million before foreign exchange gains or losses; fully diluted shares to be in the range of 44.7 million to 45.7 million shares. In conclusion, despite uncertainty in the macro economy, we expect to continue winning market share in the cloud computing, automotive, and telecommunications market. We believe the future is bright. I will now open the phone lines for questions.

Hi guys. Congrats on the solid execution. Michael or Bernie, just wanted to get your view on the macro environment. You guys have a lot of company specifics where you can take share, but you're not immune; the tide is rising or if it's falling like it is right now. So any color on the linearity of demand you saw and how you view 2019 growth potential relative to what the overall market is doing versus what sort of incremental share gains you guys can take in any number of product areas where you have new design wins?

Ross, okay, so good question. All of MPS's growth is from the new product and then you in the new market segment that Bernie mentioned: the automotive and industrials and computing. And especially in Q4 last year we saw a dramatic slowdown. We asked around our customers and it seems to me is all due to the economic uncertainty regarding the futures. However, in the middle of all of this, we see that not all the products stopped and delayed their introductions. But some of the end products still introduced or we secured some market share. In 2019, we still expect to grow and have very healthy years, but we cannot tell whether the percentage growth will be the same as the last couple of years.

And if I could add to that Ross, what we're observing, again, only from our specific position is that the design wins are in place, our end customers are interested in going to market, but there's just not the right conditions for them to invest in that type of new product ramp. I don't have any view as far as how long this will last for or when we start to see the improvements come around. But I do believe very confidently that we're well positioned to take full advantage of that turnaround.

Thanks for all that color. I guess, as my follow-up just on the inventory side, I know you guys have talked about increasing your own internal inventory to be ready for those ramps. So, I guess, a two-part question: One is, is that still the case or should that inventory come down if those ramps continue to be delayed? And then two, could you give us an update on what the channel inventory situation is and what your expectations are for that as well?

Ross, I like that question. The inventory I think we see there is a lag. Clearly it is very valid. In this kind of transitional market conditions, we watch very carefully. That's why I like that question. Of course, there's a delay. If demand is slowing down, we control our inventory to come down. We control it very closely. Now Bernie, you can provide more details on the numbers.

On the second side of that question, as far as how the channel performed, we fill orders based upon our customer demand—90% distributor related. The distributors are creating that demand with those orders based on the information they're getting from their customers. The slowdown occurred during the quarter, so we ended up in a position where, in terms of both dollars and days, the channel inventories did increase, and managing that going forward is reflected in our guidance for Q1.

Got it. Thanks guys.

Hey, guys. I'll apologize because I missed most of the prepared comments, but obviously a slightly weaker guide from March. Just wondering as you look into the full year, you typically see a much stronger second and third quarter in terms of seasonality. Is there any reason to think some of the near-term effects you've seen that are hitting Q1 extend into Q2, Q3 or should we be thinking about a more traditional seasonal pattern as we get out to the June and September quarters?

Yes, I think when we responded to Ross on this, we really don't have good visibility; there's a lot of uncertainty relative to the out quarters. So when we look more short-term at Q1, even let me go back to our Q4 for a second. We've put up some very significant numbers in all our groups except for consumer, which was most price sensitively impacted by trade and tariffs and the macro particularly in Greater China. The point that we also observed is that a lot of the new product ramps that our customers were building expectations around have been pushed out in this period in time. It's hard for us to say concretely how that's going to affect our overall growth rate for the year or when we expect a turnaround to begin.

Okay, great. And then just a second question again I'll apologize. Did you sort of give a backlog number? I think you've, for most of the past three, four years, tended to be at 80% or so of guidance in backlog started in the quarter. Are we in that metric range for the March quarter?

Yes, we are.

Yes, thanks and nice result in a tough environment guys. I guess, I was hoping to understand gross margin at least in the near-term just a little better. I know it's obviously softer. I mean, is the primary driver that just simply mix? I would have assumed a better mix in Q1, but are we - Bernie, if you could provide maybe a little more color there on what your expectations are by segment maybe it almost seems like consumer is going to be a bigger contributor to mix in the first quarter.

Sure. When we look at Q4, let's just start with that. That was clearly mix because when you look at the influx of revenue into the communications, that was predominantly lower margin business, and we discussed that in Q3 as well. The continuation is the same. But then you had some of our high margin products that underperformed expectations. As a result, those are very high margin, and it was the offset against lower margin business that accounted for the 50 basis points. When we look at Q1, we still have some overhang of mix issues. It's not all of it. We're anticipating that we will need to look at our inventory provisions in a different light with lower demand. We've talked in the past that our inventory has a long shelf life and we believe that all the products are ultimately going to be sellable. But the method of how we determine our inventory provision is based upon near-term demand.

What we foresee going forward, if all the new product delays are resolved, the margin will stay as it is now. We don't see a dramatic change. A dramatic change is all relative. A 0.5% change looks fairly small from our consistent results in the last four or five quarters, and that is due to the mix. All the new product revenue is delayed, and going forward we expect to grow the gross margin very consistently as the economy recovers.

Got it. Thanks for all that color. And then just shifting gears quickly to server, you've talked, I know in the past about the potential server content for you guys around 50 today, but going to 70 next year. And I'm just curious, because you were talking about 48 volt in your prepared remarks. How much of that 50 to 70 captures any content gains associated with 48 volt core power market share for gains for you guys? I mean, is 48 volt a material content driver for MPS?

Yes. We actually expected in Q1 2019 and obviously it's actually number is a much smaller number. We see it not in the first half anyway but in the second half of 2019 and early part of 2020.

Great, thanks for taking my question. Based on the backlog and the order patterns, would you expect or, I should say, it seems to me that we'd expect lower than maybe typical seasonality heading into Q2. Is that the right way to think about the model, given that you maybe started seeing this weakness a little bit later than others and seems to be at least a couple quarters of weakness for what everyone else is seeing?

Yes, I don't see there being a quick catalyst that would create a turnaround. So I think while we only guide one quarter ahead, I could support that thesis.

Okay. And then as it relates to inventory, Bernie, I think you mentioned that channel inventory on days and dollars were up again in the quarter. Does your guidance for Q1, combined with what you expect to sell through, would that support lower dollars and days at the end of Q1 or something different?

It's more likely that we will have been down in dollars, but probably close to flat in days because you have a smaller denominator.

Yes, thank you, and congratulations on the record year. I'll start here from the macro stuff and I'm pretty interested in BCD 6. Could you elaborate a little bit more on what that means for products going forward? I mean, you talked about 55 nanometer and 12 inch wafers, but any other color you could add?

Yes. These are actually as usual. With every other year we introduce and develop newer technologies, and that is really our foundation for the future of growth. BCD 6, as we said, BCD 5, including memories, now will include much denser logics. And now we mentioned it is a 55 nanometer and we will have those types of logical designs. So you can think of that way. We're really putting entire systems almost onto single chips, which mean we included the microcontroller. This will give access to many more market segments and much more capability.

From a cost point of view, there is a lower unit cost involved with this process and this geometry, and how we choose to deploy that cost advantage will depend upon the end market. For example, in consumer, that will extend our ability to be price competitive. In other markets, it'll allow us to improve our gross margins. In others still, it'll allow us to compete in markets that we hadn't been previously able to enter.

Thank you for that color. You mentioned e-commerce and your website going up and running last year. Could you give us some color on how the feedback has been so far, and how the learning curve is going for customers?

Yes, we have our website up and running. But I said we're still learning. As expected, this is very new ground for everybody; nobody attempted that before. We're still trying to figure out why, when we provide the floppy disk, it's a lot more effective than going through a website. We are seeing more and more customers use our fixed product, and then choose programmable parts, and we are seeing a clear direction. However, how effectively we're using the website, we're still trying to figure out.

Very good. One last question.

I just wanted to caution that we've tried to set our expectations around the fact that we may have zero revenue in 2018, and zero revenue in 2019. That's not entirely true because we are generating revenue. However, we expect a slow ramp in 2020 and 2021, and 2022 is when we expect it to contribute materially.

Are you talking about the e-commerce?

Yes. In that respect, we are not going to generate any revenues on programmable parts revenue from our website yet.

Now that's very fair. Just one last question. You mentioned communications coming back. Should we assume that the new 5G products will help get the gross margin going again with communications revenue?

Absolutely. As I mentioned in previous quarters, we will see communication revenues, and we see the opportunities. Even though it is a lower margin, it will contribute significant dollars. At the same time, I haven't given up on the higher margin communications. Once we introduce the right product, we'll get into the market.

Very good. Thank you again for the color.

All right. Thank you.

Thank you, good afternoon. Bernie, I wondered if you could give us a bit of color by division on the sequential growth or decline in the different business units as we move into Q1. I think that would be helpful. Thank you.

Sure. When we look at mix, obviously the traditional way to sort of view it is that consumer is lower and also the legacy comps business is on the lower end. Just as far as the transition from Q4 to Q1, we've guided about flat gross margin, but the mix is less bad in Q1 than in Q4 because we continue to see growth in our computing and automotive. Some declines in industrial, but you have to consider industrial has outperformed its historic patterns in the last two quarters. So that's not coming as a total surprise. Consumer is doing a little bit of an exaggerated step down from Q4 to Q1. So that's the mix we're looking at: computing and automotive are continuing to outperform expectations, while there are some declines or exposure to both high-end and low margin opportunities.

Got it, that's helpful on the mix. If we look forward in the computing and storage business, can you remind us again about exactly the mix and exposure to the computing side and the storage side? It seems like there are some catalysts on the computing side from a share perspective and 48 volt, but this has been a pretty challenging environment on the storage side. So an update on the mix and how you're thinking about those two different segments recovering as we go through the year would be helpful? Thank you.

Sure, so storage is a significant part of our business, but it has declined as a percent only because it hasn't grown at the same rate as what we've seen on the compute side. If you look at last year 2018, SSD in particular ramped early and sustained that growth all the way through mid-Q3 before starting to decline. I currently see some stabilization there, and in Q4, for example, storage represented about a third of that line item. When you look at computing, obviously we've had a significant run-up in our server and workstation segments, which are at an elevated level. Some initial sales related to GPUs are falling off as that market or those customers take a pause.

Hi. Thanks for taking my question. Just on the extension of the end markets or segments in Q1, when you commented that you saw new product launches delayed, was there any particular vertical you're seeing that in? Is it a delay in new smart meter industrial products? Is it a delay in automotive products? If you could just give a little bit of color on that.

Actually, Bernie mentioned it earlier. We see delays across the board: automotive, industrials, as well as computing.

Yes. Apologies if I missed it.

No. It's okay.

Thanks for taking the follow-up guys. Any update on the e-motion product revenue traction?

Yes. We actually started to see pretty meaningful revenue from January on. Our new integrated solutions are selling well through the website, including reference designs. We're receiving very good feedback on these.

Great effort.

But the revenue is still in the early ramp stage; however, it's ramping at a high percentage.

Thanks for giving us a chance to respond. We had an internal discussion on whether we had too many items out there. We aren't shying away from it; it's just that we're competing against a lot of other opportunities to discuss.

I understand. One other opportunity you've mentioned a couple of times tonight is 48 volt. I think there's one small semi company that's pretty well known to have a big share in that market. We're also aware that one of the main consumers is GPUs. Are you seeing revenue for that product today, or is it more a couple quarters out? And, of course, we know automotive is moving in that direction too. In which market do you expect to generate revenues first, and how close are we?

Actually both; automotive is already in the high-end cars. I think now it will trickle down. Last year we expected to have revenue in the second half of 2019, and we still anticipate that. The demand still exists, regardless of the market.

Your product is competitive and ready, recognizing revenue in the back half of this year?

I believe so, but in terms of how it impacts our revenue, that's difficult to estimate right now; I think these are high-end systems and just a matter of quantity.

Yes, thank you. Good evening. Just one question for me, Bernie. Could you clarify one of the comments you made earlier on the inventory provisions? You said you need to take another look at that. Is the right interpretation of that just changing the quarterly reserves that you typically make? What about the magnitude? Is there any impact on margins from that?

Yes, I haven't specifically calculated any exposure to what we've done in the guidance; I just want to provide a little bit of a step up. The rationale is that we have a mechanical way of determining that number, which is based on the next six months' demand. If your six-month demand looks to be going down that could increase the likelihood of having an exposure. It's not to call out any specific product or end market; it's just being generally conservative in the guidance we're providing.

As of today, we don't see any dramatic change. It's all small numbers of change. When Bernie is talking about market changes, again, it's like in last year December at the end of the quarter. It may change again, but right now we see things are pretty normal.

Yes, thank you. I just had a quick follow-up back to BCD 6. I think you talked about having a $17 billion SAM, and I'm just wondering what BCD 6 does to that SAM number?

Yes, we haven't got to that point yet. That's a very good question and certainly we see in our applications that we targeted we can integrate many microcontroller features.

Just to be clear, those micros would you develop yourself, right? I mean you wouldn't buy off the shelf ones?

It depends on applications. Some of the applications we know now, we rebranded and we do have our firmware in the micro. But our total integration has a clear reason, is cost-effective or by size limitations. If we integrate it then we are not going to develop grown-up microcontrollers. Those would most likely be licensed.

Sounds good. Thank you very much.

Okay, thank you.

I'd like to thank you all for joining us for the conference call and look forward to talking to you again during our first quarter 2019 conference call, which will likely be in April. Thank you. Have a great day.