Monolithic Power Systems, Inc. (MPWR) Q1 2013 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Monolithic Power Systems Incorporated First Quarter 2013 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will be given at that time. (Operator Instructions) Today’s conference is being recorded. I would now like to turn the call over to Meera Rao.

Thank you. Good afternoon and welcome to the first quarter 2013 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 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 Q1 earnings release and in our SEC filings, including our Form 10-K filed on March 5, 2013, which is accessible through our website, www.monolithicpower.com. MPS assumes no obligation to update the information provided on today’s call. We will be discussing operating expense, 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. 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 2012, Q4 2012, and Q1 2013 releases, as well as 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. MPS had a record first quarter with revenues of $51.5 million. The represents a 6.8% increase from the previous quarter instead of the…

(Operator Instructions) The first question comes from Patrick Wang from Evercore Partners.

Congrats on a great quarter. First question I've got is, it sounds like you guys are pretty – you've got a lot of good stuff in the pipeline for the second half of the year, I'm just kind of curious, as you look ahead, which areas do you think you'll get the most growth in terms of just end markets, because it sounds like a lot of stuff in a lot of different areas?

Yes, Patrick, we in the last couple of years or so, we focused on the different market segments, such as networking, servers, and the industrial, and the AC to DC line including also the LED lighting, last year we also added another product market segment, battery chargers and the battery management. In all of them, we try to do the best we can and based on how the new technology which provides much more small, efficient energy efficiency of a product, we're designing as many as we can, and we treat all the markets equally, and so far we – at this time, we see all the markets are ramping up, and that's what's very exciting.

Got you, that's great. So the second question here is, when we take a look at gross margin for Q2, the gross margin guide at the midpoint, it was a tad little lighter than I would have expected and I take a look at your product mix and computing has come up a bit, it sounds like you've got a consumer ramp coming, can you give us some puts and takes on what's going on in margins from Q1 to Q2?

Sure. What we expect as a new product starts ramping is that you expect to see a gross margin expansion, particularly as our high-value products kick in, as more and more CoolPower comes in. So we're expecting to see the gross margins expand. What you're also seeing in here is there's always a certain amount of play in the gross margin, there's so many factors in there that economies decide, but we do expect to see a gross margin expansion.

Yes, basically your target module is fairly higher, but as I've said in last year also, in the second half of this year, we will grow all the products in high-end market, which is the networking, telecom, and industrial, automotives, and other new segments like battery management. So they will start from the second half of this year. And also, as you'll remember, in the 2011 and 2010, that we gradually started phasing out the BCD2 Dc to DC product, and from the last year, on the (indiscernible) designing and the revenue happening in the first half of the year is a lot more than in the second half of this year. So, the gross margin will keep improving.

Perfect. There isn't any concern about pricing pressure or anything because you guys seem to be in a pretty good competitive position?

The new market segment that we entered directly of course, it is all the gross margins were very good and without competing with the price. We really like to offer customers the value of the product. In CoolMOS product family, which is more adjusting, more high-volume consumer oriented product, we don't have – the price looks competitive and MPS, we can depend our other position not sacrificing a lot of the margin.

Okay, and you still expect that, the CoolMOS part to be over 60% of sales by kind of exiting this year?

Actually, it's BCD3, we expect revenues from BCD3 products to be about 60% to 70% of our revenues as we exit this year. The CoolPower family of products is just a portion of it. It's a module that we are talking about, it's the parts that are going into servers, notebooks, all those parts are also BCD3 but they're not CoolPower. CoolPower family of products are the ones that go into high-volume consumer and consumer like market.

Got you. Last question, I just hope you could provide a little clarification. There's been some concern that you guys have a lot of notebook exposure. When you take a look at your financials, the way you report computing, I think this quarter you guys had 24% of sales, my understanding is that most of that is higher-margin higher value- added type of products but could you just kind of set the record straight?

Sure. In Q1, the bulk of the revenue in computing is from storage, and as you pointed out, that's got a very good gross margin profile. Now we're seeing increasing revenue coming in from SSD where we expect to see revenue come in from notebook, shockwave-based notebooks in the second half of this year and that would be all incremental revenue to us that we haven't had in the past, and you've got to remember, it's the same technology that we develop to go out to the server market and the telecom market and this allows us a way to monetize that technology earlier and it also helps us that the same OEMs and ODMs are designing our products for notebooks are the same guys who have been designing these products for servers, and so this helps us to build up, to prove to them the viability of our product. So for us, the notebook market opportunity in Q3 is all upside and it is very positive for us.

Perfect. Thanks so much and congrats again.

The next question comes from Tore Svanberg from Stifel.

Thank you and congratulations on the nice diversification. I was hoping you could talk a little bit about your visibility into Q2, either by order linearity, backlog, or even qualitatively talk a little bit of how you feel about the visibility for Q2?

We saw very good order activity last quarter, except for a little bit of a slowdown in February around the Chinese New Year. We have seen that continue strong into April and I can certainly say setting where we are right now this looks so much better than the second half of last year.

Very good. And you mentioned a new design win with a telecom customer. I assume that's above and beyond what you already have with a large networking customer. Can you elaborate a little bit more on the revenue potential from telecom?

This is just to give, we were just giving examples, and we have many design wins in the telecom side, and what size of the market – this is very new to us, we see this kind of design win in several places and so we try to establish what the market size is, we know that it's very big. So the first thing I tried to do, I went to our server room, look at how many traffic. We have six, seven of them -- like MPS size of the company, we have six, seven, (indiscernible) and what we are generating is either several hundred dollars per chassis and there is a lot more out there. So, you can see us in all these larger buildings, they always have a server extension. So we have with that incremental revenue as sort of roughly estimated a (indiscernible) volume.

Sorry, just to add to that, what (indiscernible) for us is we're offering our customers a choice of either going for this high current module or these standalone solutions and we're finding that winning with both of them, and what you're seeing right now, we just chose to – we had talked about win as a networking company before, and in this case, we are talking more about how the standalone solutions are playing out, and this is just one win and one chassis and we see this proliferating into more different kinds of boxes at just this one telecom company. So I guess you'll be using it more to kind of highlight our successes, and I think as we go on, you're going to see a communications network in revenue going to be a more sizable portion of our business.

Very good, and then a question on inventory, a good $2 million or $3 million this quarter, I mean is this pretty much, are you giving up for the stronger ramp in the second half, especially with BCD3 products of higher percentage?

Yes, we are. We also started to ramp some of our newer products because we have seen a strong demand for those projected out in the second half and so we are kind of making sure that we have enough products available to service this market. For some of the traditional products, we usually go a certain amount by history, but from what we hear from our customers, we are expecting a sharper ramp and we just want to be prepared for those demand ramps.

Very good. Just last question for Q2 growth, should we assume the growth to come from all of your end markets, even consumer, I'm thinking obviously it may come down as a percentage of revenue but it will be up in dollars terms?

Yes, I expect this to come from consumer as well this quarter because seasonally Q2 and Q3 are the strongest quarters for consumer and we see an increase over there as well. The other market segments are going to do well, just as we've seen the new product design wins kick in or as the market share gains kick in.

Very good, nice quarter, thank you.

The next question comes from Vernon Essi from Needham and Company.

Thank you for taking my question and I echo the congrats on the diversification efforts, these are great results. Wondering if we can just dive into a couple of point questions I guess on the product side, and Michael, you've talked a lot about this AC to DC EasyPower primary side solution, where are you seeing the success for that product right now, what is the end market that seems to be hitting, getting into a lot of hits, or is it sort of very diversified?

Yes, this market segment, we really provide the values of much higher efficiency, and in the sub 5 watts, there is no good solution in the market segment and it takes a lot of demand for that, especially some of the wireless, the micro-wireless, I call them the micro-wireless network, and like (indiscernible) and (indiscernible), these are buildings of the nations. So we have a product line that's called EasyPower and we design it into a many of these products segments. So, we see a lot of design win with a lot of revenue. And also, we also talked about the synchronous rectifier and that's geared towards the higher power, that's over 100 watt power. So I'm just using MPS solution where it saves 3%. 3%, that means 30% reduction in the energy losses. That's a huge amount. And we don't charge on (indiscernible) the customers that were replaced by a single discrete component and they will improve the efficiency by 30% and by the reduction of the losses by 30%. So, game consoles and also other computing systems, we see a lot of (indiscernible) activities and all going to pending to a revenue in the second half of the year.

So, let me kind of just to sort of restate some of the points there I thought was interesting, so when you look at this market, you're seeing the most activity on both ends of the spectrum, under 5 watt, over 100 watt, it sounds like you're not terribly competitive or you're not strong offering sort of in the middle you do but it just seems like you're getting more attention on both ends of that.. Can you help us understand which area you think is going to add more dollars content or generate more revenue rather maybe over the next two years or so and where do you see the most growth?

Well MPS, as you said, it is not competitive in the middle end of the market, that's not true. MPS, we just focus on where we can deliver the best value for the smallest dollar amount or the biggest bid bet, and that's what we are really focused on now. So to answer your question, where is the growth with the dollar content, for our sub 5 watts, our dollar content in the modules are very, very high, and also over 100 watts, the semiconductor cost of the power supply which is very little, but in the MPS synchronous switcher, just improve the content, improve the efficiency by that much, so we will have about somewhere from $0.25 to $0.75 in each power supply for over 100 watts.

Okay, and I assume that dollar content would be lower in the sub 5 watt category?

The dollar content, sorry I didn't answer your question, the dollar content is somewhere from $0.25 to $0.50, $0.60.

And I'm sorry to go back to the original question but in the sub 5 watt, I'm just kind of curious because I think a lot of people think there's a lot of growth going on in these sort of sensor networks and what have you, where do you see the demand on that, is this a situation where you're just sort of supplying into a distribution partner and sort of not understanding perhaps where that's getting pulled or are there specific customers that have approached you, and if so, what specific kind of end markets do you see that at?

I think there's pulling from here, I can't recall more than (indiscernible). I think there are more than seven customers into different market segments, from power meters, from lighting LED, and also using the power product (indiscernible) the EasyPower product, and also white goods and other industrial segments, uninterrupted power supplies, and the building automation, and we see all of them.

Okay, and let me put one quick follow-on question you've brought up a couple of times, you've talked about a console win. Is this a product that's ramping right now or is this sort of a second-half 2013 production ramp?

It is the second half of 2013.

The next question comes from Steven Smigie from Raymond James.

Great, thanks a lot, I'd like to add my congratulations as well. You saw a nice performance there in the storage business. Can you talk a little bit about how you see the profile of that going forward as that continue to ramp even into next year? I mean I'm sure it will be some more tied to certain platforms but can you talk a little bit about that, and then specifically I know you've got a wide variety of customers there, if you can update us of where you're seeing the demand from?

About a third of our storage revenue right now is coming from SSD and we continue to see our SSD solutions being accepted by most players, and as I've explained before, we have three kinds of customers, we have the flash memory folks,, we have the integrators as well as the HDD players who are all in SSD and we continue to see us getting more sockets on them as we get on to more platforms with them. We're also increasing our product offerings in SSD. We also have new products that they are rolling out for HDD. So this is a market where we expect to continue to see revenue growth both this year and next year.

I should add on, I see a very optimistic market opportunity, particularly in the SSD side, and I really believe this is the beginning. The opportunity is huge and one of the Chinese Internet companies that released some report last year that they converted all or most of their HDD to SSD and the efficiency went up by huge amount, I forgot the numbers, and it was a very successful story. I think that most of the Internet companies will convert to SSD. So that opportunity is huge for MPS.

Okay, great. And then I just wanted to follow-up on the mini modules. It seems like you've got extreme opportunity there. It seems like it goes across a whole bunch of markets. So can you talk a little bit about how you sort of figured out which markets do you focus on and where you think you have the most opportunity there?

Obviously we're designing in the large networking companies, and now with the same technology, we are very excited about it and that applies to for our pharma consumer all the way to industrial. So we really have a product line for MPM.

The next question comes from Ross Seymore from Deutsche Bank.

Congrats on another solid results, and guys, just a couple of follow-up questions on what's been asked already. Can you give us a little bit of a hierarchy ranking to gross margin by the end market segments that you have to help us figure out how to fold-in when the revenue growth from these product cycles occurs?

Sure. Industrial has the best gross margins (indiscernible) as we would expect. Currently computing has the second best because the storage revenue has very high gross margin. I guess communications is the third. Going forward, as the new product revenues come in, I can't say whether computing or communications, which one will be second and which one will be third, and consumer of course will always be the lowest gross margin.

And does the computing side on the Shark Bay platform pull the computing down or up, how should we think about that dynamic?

That will be at corporate margin.

Great. And then, the OpEx side of things, you guys have done a good job of controlling the OpEx while you're investing through this diversification period. How should we think about how OpEx will trend, especially with these product cycles taking off in the back half of the year?

We will start investing in R&D as well as sales and marketing in the second half of the year. This is critical for us as we hit some of our historical ramp, our revenue the way we want to, into 2014 and 2015. So we will be investing in that growth in the second half.

Yes, I should say that in the prior earnings call, I emphasized that we don't invest in the sales and marketing, and now, in the middle of the year and after we've done all the transitions of how things ended up from their last year, we see a huge opportunity and all the doors are open, so we need to invest in, reinvest in R&D just a bit more.

Great, and the last question for me is just a bit of a housekeeping one. You had a patent litigation benefit in the first quarter. Does that repeat itself in the second quarter and then is that the end of it or is it already done?

Yes. The last $400,000 that kicks-in in Q2 and then we're done with that particular one. We still have the O2 litigation open but we don't know the timing of when that money would come in.

But we have a potential it's still as a larger amount of money.

The next question comes from Lena Zhang from Baylock RV.

You have commented a lot about end markets. If you could give us some Q1 performance and Q2 demand by region, that would be very helpful. Thank you.

In Q1, we grew revenue in the three target markets that were critical for us, the ones that we have targeted for growth, communications, computing, and industrial. So we're very happy with the progress that we saw over there. And we even expect to see growth continue, we also expect to see consumer revenues kick-in in the second quarter.

I'm sorry, probably I didn't speak clearly. Actually I would like to know about by region, by geography.

From geography, Asia ends up being the factory for the world and we see most of our products irrespective of where they are designed in being manufactured over there. So I would say that the majority of our products will be manufactured in either China or Taiwan, and if you take up all of Asia together, I think it will be somewhere between 85% and 90% of our revenue.

The next question comes from Gus Richard from Piper Jaffray.

In your telecom opportunity with the large manufacturers, can you talk a little bit about what sort of end markets you're getting to, is it wireline communications, is it wireless base stations, can you give a little bit more color as to where you're starting off at that customer?

You're asking about the one where we're designing in our Intelli-Phase as well as controllers?

Correct, and the modules, yes.

Okay. The module is going into a wireless router and that's something we expect to begin production next quarter and we have got our first purchase order for that. And for the parts that are just Intelli-Phase and the controllers, that's going into switchboard chassis and that's something we also expect to start shipping into the second half of this year.

And when you say wireless router, is that an EDGE router or is that a Wi-Fi router?

No, it's not wireless, it's not a Wi-Fi router. It's more in the input structure.

Right, okay, I just wanted to make absolutely sure I was clear. Those were my questions, thank you.

The next question comes from Vernon Essi from Needham and Company.

Thanks for taking the follow-up here. I guess two topics I wanted to explore. First on your lighting, if we look at sort of your year-on-year numbers, they were down, and I won't overstate that, that's obviously I realize a small portion of your revenue, but you're probably winding down completely the CFL inverter contribution. What is this going to look like for 2013? Do you expect to have year-over-year growth or do you think it's going to be a closed call, and are you seeing enough demand out there in LED to kind of make a lift here?

This year LED lighting will grow, will grow substantially.

So what you're seeing in the numbers there is backlighting going down and that's tied into the monitor business that we have in the notebook market, but you are seeing LED lighting go up and we expect, as Michael said, that LED lighting will continue to grow for us this year and next year.

Just to help us frame that, I mean the percentage of backlighting as a proportion of that number for, let's say you closed out 2012 at, and I can't put that quickly enough, $25 million, how much of that was backlighting driven?

In 2012?

Yes.

In 2012, it was about maybe $5 million.

$5 million, okay, alright. And then, this is clearly another just a question I think everyone looks to me like I'm some nuisance, but Michael, what's happening to some of these legacy products that clearly you're deemphasizing, what's happening to the marketplace with the competitors, are you seeing really aggressive price activity or what seems to be the main tone if you will out there? Obviously I realize you're not focusing on getting standard (indiscernible) parts or what have you that are flowing by the weight side, but how has that environment been?

It's stabilized and I don't see the price going down. So, with MPS and BCD3 products, the CoolPower based on the BCD3 are very competitive in the market, and it's our choice to go from that segment or not, and now we have a bigger fish to catch now.

Okay, but so if you were to look at the legacy part, it's in a state of somewhat atrophy just because you're not out there actively designing them or is this becoming more price (indiscernible)?

We do it, we do it actively depending on our existing position and a lot of BCD, the product line that we call, these are mini monsters and those type of things if you remember, and these are based on BCD2 product, and they do have those products that feel the price pressure and now we actively replace it with the CoolPower.

The next question comes from Steven Smigie from Raymond James.

Thanks for the opportunity to ask some follow-ups. Just with regard to the BCD policy, BCD2, whatever you want to call it, will you use that still going forward for say some higher voltage applications, and keep BCD3, BCD4 more for just lower voltage with higher current applications or would you take the other BCD3, BCD4 also to higher voltage?

We do have the plan in the high-voltage, mostly in the industrial applications, automotive, and these are much price-sensitive, and also they require a very long qualification. And BCD2 products, they're doing well in those market segments. Not that many companies operate more than 36 volts DC to DC product. So we don't have to change that very quickly, although starting from this year, and even in the industrial and automotive product, we are designing the BCD3 now.

Okay, great, it was helpful. And then just on BCD4, how's the timing of that at this point?

I think the first product will be where we release first product in the next couple of months.

Okay, so if you just look at industrial, you had some decent percentage growth, obviously it's off kind of a small base. Is there room for that to double this year?

The industrial market?

For the industrial?

Yes, because you have a lot of new, it seems like you have a lot of new products there, in AC/DC for example, and I know sometimes some of that stuff is slower to get traction to get some of the new products there, just wondering if there's potential for the industrial market to maybe double in the next…

I can't answer you directly, I mean whether the number will double or not, but industrial, the nature of that business is a lot of the small size of customers and we added together and whether their projects are going to kick in or not will be a bigger uncertainty but the bottom line is that this year they're going to be much better than the last year and we see that in 2014 too.

So you saw that in Q1 we grew our industrial revenue and we expect it to grow again in Q2. You've seen a lot of design wins come in and start ramping up. So I expect that by the end of this year, we'll have very good growth, whether it's going to be double, that's the part I don't know. But cumulatively, it's going to be very good.

Great, fair enough. And last question is on LED lighting, not so much the backlight stuff but specific to the LED say for bulb replacement. It seems like your guys can go across a whole bunch of different markets. Do you think the primary market would be sort of a bulb replacement driver type solution in sort of like a household application or do you see it more opportunity in say something like LED lighting for cars, sort of like in the headlamps and the tail lights, et cetera, so what would you see as the biggest drivers across the end market?

We are more focused on the commercial lighting and that's including commercial, that being the buildings and the factories, and even airports and the nuclear stations, those are industrial applications. And also we have a line of a product for automotives and headlamps and tail lights and those kind of replacements, and not much left to focus on in the consumer lighting.

At this time, I am showing no further questions. I would now like to turn the call back over to the presenters for closing remarks.

I'd like to remind all our listeners that we have our Analyst Day on June 6 at our headquarters in San Jose and we'd like to encourage you all to register at investorrelations@monolithicpower.com. Other than that, I'd like to thank you all for joining us on this call and look forward to talking to you again next quarter. Thanks. Bye-bye.

Ladies and gentlemen, that does conclude the conference for today. Again, thank you for your participation. You may all disconnect. Have a good day.