Monolithic Power Systems, Inc. (MPWR) Q1 2015 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Monolithic Power Systems Q1 2015 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 follow at that time. [Operator Instructions] As a remainder today’s conference is being recorded. I would now like to turn the conference over to Meera Rao, CFO of Monolithic Power Systems. Ma’am, please go ahead.

Thank you. Good afternoon, and welcome to the first quarter 2015 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 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 2, 2015, 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 gross margin, operating expense, operating income, other 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. 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 2014, Q4 2014 and Q1 2015 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. MPS is pleased to announce record first quarter revenue of $73.5 million representing a 22% increase from the first quarter of 2014. This year-over-year increase which was well above the industry average was fuelled by diversified growth in revenue from all four segment. MPS’ non-GAAP gross margin also expanded 100 basis points year-over-year to 54.8%. Excluding the one time payment of $9.5 million from O2 Micro in Q1 last year our non-GAAP operating income of $15.6 million grew 117% and non-GAAP EPS of $0.37 increased $0.20 over the first quarter of 2014. Looking at year-over-year revenue growth by market segment, industrial was up a record 36%, communications revenue grew 27.4%, consumer revenue was higher by 20.8%, and computing also increased by 7.5% over 2014. Let me speak to the results of each end market. In the industrial market sales rose to $13.3 million, fuelled by product sales for applications in automotive, smart meters and power sources. Communications revenue grew to $17.3 million, largely attributable to growth in networking and telecom opportunities. Gateway revenue also increased year-over-year on market share gains. Revenue from consumer market increased to $31.5 million driven primarily by high value consumer markets like home appliances, gaming, battery management and LED lighting. Computing revenue also increased to $11.4 million. Turning to the financials, our first quarter revenue of $73.5 million was above the midpoint of our guidance. Compared with Q4 2014, revenue decreased by $2.2 million or 2.9% on seasonally lower income – I’m sorry, on seasonally lower revenue in the consumer client based gateway and computing segment. Non-GAAP gross margin was 54.8% slightly lower than the prior quarter. Our non-GAAP operating income was $15.6 million compared to the $18.3 million reported in the prior quarter. Q1 non-GAAP net income was $14.9 million or $0.37 per fully diluted share compared with $0.43 per share in the previous quarter. Let’s review our operating expenses. Our non-GAAP first quarter 2015 operating expenses were $24.7 million. $1.4 million higher than the $23.3 million we spent in the fourth quarter mainly due to higher new products spending and increased compensation cost due to pay raises and higher payroll taxes. Our GAAP operating expenses were $33.8 million in the first quarter compared with $31.8 million in the fourth quarter. The difference between non-GAAP operating expenses and GAAP operating expenses for these quarters is stock-compensation expense as well expense on an unfunded deferred compensation plan. Stock-comp expense included in operating expenses was $9 million in the first quarter compared with $8.3 million in the prior quarter. Investment expense related to the deferred comp plan increased GAAP operating expenses a $166,000 in the first quarter of 2015 compared to $176,000 of expense in the fourth quarter. Turning to other income, first quarter non-GAAP other income of $516,000 was $229,000 higher than the prior quarter primarily due to foreign exchange…

[Operator Instructions]

Now, let’s look at the balance sheet. Cash, cash equivalents and investments were $239.2 million at the end of the first quarter of 2015, slightly below the $244.1 million at the end of the prior quarter. This reduction in cash was attributable primarily to the $10.4 million we spent to purchase 203,000 shares under our stock buyback program; payments of the $5.9 million quarterly dividend and $4.7 million of capital equipment purchases. In Q1, MPS generated operating cash flow of about $13.6 million. Cash proceeds from employee stock option exercises and employee stock plan purchases contributed another $2.4 million. Accounts receivable ended the first quarter at $25.3 million down from the $25.6 million at the end of the prior quarter. Days of sales outstanding were 31 days in both the first quarter 2015 and the fourth quarter 2014 and down from the 33 days in the year-ago quarter. Our internal inventories at the end of the first quarter were $53.4 million higher than the $40.9 million at the end of the prior quarter. Days of inventory increased to 144 days at the end of Q1, from the 107 days at the end of Q4. Inventory in our distribution channel increased from the prior quarter when inventory was lower than usual. Turning to the resolution of matters with the U.S. Internal Revenue Service. On April 21, 2015 the IRS signed a formal closing agreement with MPS that resolves the IRS audit of the company’s taxes for the years 2005 through 2007. The resolution includes the following elements. During the second quarter of 2015, MPS will make a payment of $1.2 million for taxes related primarily to the revaluation of a license for certain intellectual property rights of the company, through one of its foreign subsidiaries. The buy-in payment is final and no additional payments will be required with respect to the intellectual property license, for the years under examination or for a previous or subsequent tax year. MPS expects to make a related $1.1 million interest payment in the next few months as well as approximately $200,000 tax payment for the years 2008 to 2013. Under GAAP, the income tax impact is recorded in the period of resolution. Therefore, the results for the second quarter will include a one-time net charge of $2.3 million reflecting the taxes and interest to be paid, partially offset – which is partially offset by the reversal of previously accrued tax liabilities and valuation allowances. Of the $2.3 million book charge, approximately $1.6 million relates to taxes and balance $700,000 to interest. There were no penalties assessed on MPS. The agreement permits MPS to repatriate approximately $17.4 million of cash from its foreign subsidiary without any U.S. federal tax consequences other than those summarized above. I would now like to turn to outlook for the second quarter of 2015. We’re forecasting Q2 revenue in the range of $79 million to $83 million. We also expect the following. Non-GAAP gross margin in the range of 54.5% to 55.5%. GAAP gross margin in the range of 53.7% to 54.7%. Total stock-based compensation expense of $8.6 million to $9.6 million, including approximately $300,000 that would be charged to cost of goods. Litigation expenses of $200,000 to $400,000. Non-GAAP R&D and SG&A expense to be in the range of $24.3 million to $25.3 million. This estimate excludes stock compensation and litigation expenses. Other income to be in the range of $200,000 to $300,000 before foreign exchange gains or losses. Fully diluted shares to be in the range of 40.7 million and 41.1 million shares before share buyback. In conclusion, MPS continues to execute against its plans and deliver high growth quality revenue. I’ll now open the microphone for questions.

[Operator Instructions] And our first question comes from the line of Rick Schafer of Oppenheimer. Your line is now open.

Just one quick second.

Sure.

Rick, was the phone line off for a minute during the call.

Yes, it was about a minute, yes. It was just before you gave the cash number, Meera.

The phone…

We can reread it. We read it again.

So yeah just before your question. I’ll just go ahead and I think we were talking about switching to the bottom line. So let me just repeat that portion, on a non-GAAP basis our Q1 net income was $14.9 million or $0.37 per fully diluted share this result is computed with an estimated tax rate of 7.5%. Q1 2015 GAAP net income was $6 million or $0.15 per fully diluted share. Now let’s look at the balance sheet and then we went on to cash, cash equivalent and investments were $239.2 million at the end of the first quarter of 2015 slightly below the $244.1 million at the end of the prior quarter.

And you were live for that Meera.

Okay, great.

All right okay.

So congrats, on a nice quarter you guys. I just had a couple of questions. The first is maybe can you give us a little more color what’s behind the spike in inventory as we look at 1Q, I mean is it supporting a particular product or customer launch or you guys seeing any – or you guys seeing any push outs or any order cancels or anything like that?

Sure, if you remember most of last year, we were carrying inventory at around 130 to 140 days and the inventory last quarter ended up being much lower. So for over a quarter we’ve been ramping up our wafers in the foundry and this is in support of higher revenue as in Q2 and Q3, these are all strategic builds that we’re doing to support some of our customers and builds we see coming ahead.

So maybe a related question, I don’t know for you or for Michael, Meera. But can you give us a sense of what percent of your revenues last year came from sort a new greenfield products and what your expectations are for this year and maybe looking forward in terms of your mix?

So if you look at last year our revenue from new products has been coming up to close to 50% of all our revenues coming from new products and for this year also we expect mix to be the same or perhaps even a little richer compared - tied to new products.

In general, we released the product and then we see revenues coming above 24 months to 30 months later. So if you specify what a green product is, these are we call it a green product. And for this year, last year, as Meera said, it is about 50% and these are products about four, five years ago.

Got it.

We’re especially we’re green to these more industrials, telecoms, and automotive and the revenue coming is typically about three years. So, this year, we just will be more fruitful than the last couple of years, we see have a lot more activity all of us three to four years ago.

Okay. And is there Michael, this is part of that answer. Is there a target mix for you guys? We look forward the next 12 months, 24 months. I mean in terms of do you want your four buckets to sort of the evenly sized in your model like 25, 25, 25, 25 or I guess do you see comps in industrial kind of become a bigger piece over time.

Our target markets are communications, computing and industrials and we’ve focused on growing those markets as fast as we can, we also recognize there is an inherent timing in each of those markets to convert design win to revenue. So as long as we see growth in all of them as much growth as we can get then we are happy with it. So we don’t have a strict number saying we want to have 25%, 25%, we don’t have anything that. We just want to see the maximum growth we can in those market segment.

Great, thanks guys.

Thank you. And our next question comes from the line of Ross Seymore of Deutsche Bank. Your line is now open.

Hi, good afternoon, guys. This is actually Matt Diamond on Ross’s behalf. I want to segue to the gross margin line a little bit. The guidance of about 55% is maybe a little given the new products rollouts, it’s maybe a little bit less than one might have expected. I’m curious if that signals a change in mix for this year, just given that consumer was a little bit better than expected, industrial little bit worse, could you reconcile those two dynamics for us?

Yes, Matt, this is Michael. That signal is it’s a really a noise and it’s not really a signal. So that and clearly where that the gross margins in a range, so we focused on the top line growth and a bottom line growth.

Okay, I’m sorry. On the - I’m sorry – [duly] [ph] noted, on the buyback, [indiscernible] that there is an extension for the buyback program, could you remind us how much has been used to-date and how much of the authority remains?

Sure, we have - the buyback was originally the $100 million was authorized through June of this year, through the end of last quarter we had bought about $72.2 million. So we have $27.8 million to go. And this extension allows us to buy according to algorithm that we have put into place.

Got it. And the $17.4 million of cash that could be repatriated that’s certainly a nice boost. Could you give us an idea of how much of your cash is generated domestically and offshore?

We have not in the past shared how much is generated domestically and internationally, but I can share with you that right now over half our cash is onshore.

Got it. Thanks so much.

Thank you. And our next question comes from the line of Steve Smigie of Raymond James. Your line is now open.

Great, thanks a lot. Now I’ll have my congratulations on some nice numbers here. And then you guys just give guidance for the one quarter out, but I think typically you have some good seasonal strength of September and I was just curious, could you comment on and if you’re seeing any reason at this point why wouldn’t have some decent seasonal strength in the September?

Yes from, we see the business is a normal and although we give a way we are very cautious for the overall market – overall MPS is feel a much similar players and that we a lot of opportunity. A – Meera Rao: Yes, you know we always guide conservatively as you know, we are like to hit that numbers. So we see business in normal macro there we see a normal booking patent. So well, we can’t give any guidance for Q3, I don’t see any problems in the horizon.

Okay, great thank you. And I guess, you said that you saw some continued gateway strength, can you talk a little bit more about, just give any color more on the telecom on the boards you have got pretty substantial dollar content, that was attracting, so as you might have hoped, or is that still in process, there?

Yes, in the – on the telecom side we actually saw revenue growth from Q4 to Q1. So I mean, and the rest of the gateway business is all about opportunistic for us, it’s based on the revenue and the mix we decided we wanted to take more. But the telecom side we’re certainly in a growth phase in Q1.

Fairchild had their earnings call recently and they talked about taking up some dollar content on a server market as they saw Infineon international rectifier merging, which they said created some opportunity for them on the short-term. Is that something you guys could capitalize on your term I know you’d had some nice product introductions in that area or we still have to wait little bit for that stuff?

In terms of the server revenue, we’ve been seeing a ramp in revenues every quarter and we expect that to continue until hit all the design, hit their stride. And we always by most of the design wins are done particularly for the Grantley cycle we are always open to picking up any new business as we see it.

Okay great, last question was just in computing I think you had talk about within your storage products you are going to introduce some new solutions for SST and I think it was like may be around PCI Express I was just wondering if that’s still on track at this point?

Yes. We introduced the PMIC for the PCI Express last year. And we have design wins and we expecting to have the revenue start in the second half of this year.

Great, okay. Thanks very much. Congratulations.

Thank you.

Thank you and our next question comes from the line of Tore Svanberg of Stifel. Your line is now open.

Yes, thank you and congratulations on the results. A two questions as first of all your consumer business was up 20% year-over-year and I know you had obviously your next generation BCD products. But if you look at that 20% how much of that growth is coming from new generation BCD products versus new applications penetration?

I think that – I don’t have the numbers to quantify exactly which is – and which in that, but overall in the growth some modules business and some other newer products and these are release the products these products released about a couple of years ago and as you know the consumer is always he can gain a revenue very quickly. But this time were a lot more pickier and these are revenues that we make sure, these are just the sustainable revenues and sustainable with the margin.

Can I…

More recently inventory also been looking at our revenues, consumer revenues as a high value market. And what we saw is a lot of strength in the high value market. We also saw pretty good performance in the rest of the more traditional consumer products as well. We saw growth in both.

Very good. And as we look at the outlook for the June quarter, June quarter is seasonally a strong period for you. Do you expect to see growth in pretty much all the segments or are there some puts and takes as far as end market doing better or perhaps where is?

As first qualify my answer by saying that we don’t have as granular view by all the different end markets as we do when we reach the end of the quarter. But I can tell you that right now we expected to see growth in most of the market.

Yes, we don’t see, this time we don’t see any – in all the market segment MPS percentage is very small, there is a lot of opportunity for us to grow although, we can deviate from a market – and impact from a macro markets but we are very cautious and we are very optimistic, okay.

Optimistic.

Very good. And on the computing side I recognize server revenue continues to ramp, but I know, there is also some potential opportunities to gain some share in notebook core management in the second half of this year. Is that still the case and could you elaborate on that little bit please.

In this particular market, we’re very optimistic. And we released the product we have a huge attractions and I think this product we do really well. And then in terms of a numbers that we is – we have a lot of design – we can lot of design win, we have a lot more design win activities you know then before. And it also including that we’re 12.5 and we’re 13.

That’s very encouraging. Last question, if you look at your module business, I know you’ve introduced some new sales strategies there. Is there anything you would like to update us on as far as your sales infrastructure for your module business?

Yes, let me answer this way first. Consumer modules always comes in faster. Their product cycles about a year or two or so. And industrial, automotive always comes later. And this year we see lot more activity than in a same period of a last year in industrial and automotive market segment.

Very good and congratulations again. Thank you very much.

Thank you.

Thank you. And our next question comes from the line of Anil Doradla of William Blair. Your line is now open.

Hi guys, congrats from my side too. Michael, and Meera can you help us understand what the end market dynamics and behaviors on the communication side I know you guys entered into some of the new vertical, so you are a share gainer. Can you share your thoughts on what you are seeing in China and some of the regarding some of the build outs [indiscernible] has reported, now they are not in your same bucket but things are weak on the outlook. So can share with us what you are seeing on the telecom side?

In the telecom side we’re still very new and then we do to the only in fact I can tell you there is we have a lot of design win activities we’re somewhat in slower than automotive on a very much encouraged by all the design activities from a last year and this year.

So for – being a new entrance in this market, you are not seeing any kind of soft dynamics out there that’s what I’m hearing, I mean you are just a share gainer there.

In the infrastructure side yes, we’re too small to say anything, all I see is opportunity.

Okay, great. And can you remind us how much exposure do you have on the PC side and the notebook side?

We’re very – we have some revenues and we pick the customers, pick the project really our customers will appreciate our technology.

It’s today, I mean when you see very small, would you see less than 5% or 5% to 10% can you give us some sense?

Yes, currently I exposure to the notebook side, is definitely less than 5%. In last year cycle et cetera, we just played in the market very opportunistically. And more excited about opportunity this year, as Michael said earlier.

Very good. And Meera you’ve talked about your BCD three, four contribution, can you give us an update and finally on BCD side, can you share with us some other end market dynamics and your lead versus the competition, thanks a lot.

You know BCD4 we’re still lead by our competitor by a wide margins. The BCD5 I can tell you this. Stay tuned now in our product is about being in productions.

And as with regards to BCD three and four, I would say it’s approaching 70% of revenue at this point.

Great, thanks a lot guys and congrats once again.

Thank you.

Thank you. And our next question comes from the line of Liwen Zhang of Blaylock. Your line is now open.

Thanks and congratulations, as well. The first question is regarding your industrial segment. March quarter usually is pretty strong for industrial and the automotive. But I see you had kind of a flattish growth, sequentially. Can you tell me what happened there, and how should I look at it during this quarter?

Industrial I would say….

Yes.

In industrial we saw strength in power sources in automotive and not meters, so this is a market where I mean we saw strength in those in security which has been on a tear for several quarters was a little softer I think in one quarter, but I think it’s more a question, customers having bought ahead. And so…

Okay, got it.

Industrial overall, they also do very well for us in 2015.

Okay. Thank you. Another question is, if you can give us some updates on your Chengdu testing facility in terms of capacity, utilization rates, as well as, so far, MPS does all the testing internally, or what's the ratio for the internal versus external?

So we’ve been continuing to utilize the test facility in Chengdu, very expensively and we also have some tasting done outside too, so that we can – there is no limit on our test capacity. And we have also taken – we are also in the process of expanding our fab foundry capacity by signing on an additional foundry. And the…

Okay.

Go on, as you’ll see some of the expenses in bringing up that capacity come on for us starting late in Q2 and more into Q3, Q4.

In terms of the…

Okay, thanks. That’s …

Okay, in terms of a percentage we have a 600 products and growing, the utilization and particularly from a percentage of a inside and outside is difficult for us to do manage, okay, we will spend more money to manage – so spend more money to calculate the percentage than as is.

I see. Thanks. My last one, maybe one analyst already asked. But I still want to understand better about your gross margin. You have more internal testing as a percentage of revenue, as well as your module product ramping up? Which, I believe, even though in the consumer application that you mentioned before, that product line's gross margin will be above corporate averages. Plus, your industrial segment will grow much stronger this year. How shall I think about your gross margin down the road?

All the products, all the products – you know pipeline are just released they are much higher than the average corporate margin, however I said that. We – the gross margins is in our models we in the at this period of time we should concentrate on the top line growth and the bottom line growth.

Okay, got it. Thanks.

Thank you. [Operator Instructions] And our next question comes from the line of Amit Chanda of Wells Fargo. Your line is now open.

Hi Michael, hi Meera. Congrats on the quarter. I'm just curious, what percentage of your consumer end market revenue is comprised of modules, at the moment?

The modules revenue we seeing increased revenue every quarter but right now it’s still a smaller percentage of our revenue.

Okay. So, do you expect to release the full suite of module products sometime in 2016? Is that your expectation?

Terms of revenue will be seeing revenue come from more modules as we go in. We announcing the revenue from the first few modules that we released over a year ago. So I think we already have released something like 12 modules. And then we have a few more that will be releasing. So as more and more of these modules get released we also see more design wins coming from them which is up for a good revenue growth in the quarters ahead.

Okay. Great. As a follow-up, I was just curious for your v-core shipments, what the customer mix is? Is it mostly made up of Asian ODMs, or US-based server OEMs, and how do expect that mix to shake out for the rest of the year?

Most in the U.S. and some ODMs

Okay. Do expect – okay. And you expect that similar pattern to remain for the rest of the year?

Rest of the year is a quick, yes.

Okay.

For the – we’re 12.5 and we’re 13 obviously hasn’t really started yet in so the next patent could changes little bit.

Okay, great. Thank you very much.

Thank you. And I’m showing no further questions at this time. I’d like to turn the conference back over to Meera Rao for any further remarks.

I would like to thank you all for joining us for this conference call, and look forward to talking to you again in July at our second quarter conference call. Thank you. And have a nice day.