Monolithic Power Systems, Inc. (MPWR) Q2 2015 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Monolithic Power Systems Inc. Q2 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, Chief Financial Officer of Monolithic Power Systems. Please go ahead.

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

[Operator Instructions]. And our first question comes from Tore Svanberg of Stifel. Your line is now open.

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

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

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

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

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

Let me answer little more or give a little more color. I’m never concerned about MPS's days of inventories because first thing, in a history of MPS we never have any large amount of write off. Because MPS is a product that lasts of six years to eight years. So in history we never -- let's say we’ll never have a material amount -- the large amount -- have a material to stay there. So we never have it. And we have a very small amount of write offs because -- due to engineering issues that weighed [ph] to a technical issue. The reason you see the inventory is, overall in the history our inventory fluctuation is because, firstly, we have a lot of engineering lot and they’re ready to take off and other customers are waiting and other reasons are of course and the manner [ph] and the demand. Than the third reason is depend on our pricing. We can use the pricing to book more materials, if it’s a favorite we’ll book more, if it’s less favorite we book less. So these are the reason that’s driving the MPS inventory. So I give the reason, Tore I gave long, long answer is because I keep hearing our investors ask that MPS has an inventory, so might as well just give a -- once and for all, I give you all the color, what’s the reason behind MPS inventory.

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

We’re moving to a new era. MPS always relates to some kind of power, this one still relates to a power, but more in the motion controls, and then we introduced in a family, it's really software driven and to have our customers can much easier to implement an motions like robot, they can really easily -- ease of use or ease their design activity. And this is not only for robot, anything motion related, including automotive, and it will be much easier for them to design. So we’re going to talk about it in Analyst Day.

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

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

No, the reason we’re not disclosing why, -- there is a reason that either our demand high or second, we have a lot of a new product launching and the third, we may booked -- have a high inventories because of the favorable pricing. We’re not disclose any of the reason.

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

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

Exactly, even in a car anything move, in the car seat, wipers, mirror and everything moves, or the breaks, and all can use MPS product. It’s much easier to use, we really provide a new platform and other ones, as ACs anything related to [indiscernible], electrical bicycles and anything that move, pumps and anything with really a precise measurement, in that case MPS will replace many mechanical parts and also replace the parts called encoders and is an optical device, we will replace all of them.

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

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

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

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

I think that Steve is asking for as in all of business.

Within the auto business.

I think within the auto business is LED that which were very strong, lot of shipments, lot of designing activities or lot current shipment is in LED and the other one is body automotive, that has nothing under the hood, it’s the body. Lot of DC to DC, these are the product we do in two category, now we shift to auto business.

You guys done extremely well here on the quarter and the guide relative to other folks, but as we look out to December that’s typically seasonally soft quarter for you, is that -- and not to guide exact amount, but is it fair to think that you would experience the pro-seasonal softness into December?

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

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

I am excited if we can have year-over-year -- and the four quarters of growth, it never happened, I expected -- I wished it happened, but it’s didn’t happen, so I can wish this year.

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

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

I’ll answer your last question first. The revenue comes in now. It’s happening. It’s already shipping. But that’s based on the product, the existing, when we acquired from FEMA [ph] based on those products, we already generate revenue. And it’s not a small revenue, its [indiscernible] meaningful to our revenue either. And to answer the other part about what the -- how bigger the large -- the market segments, it is certainly the over well -- well over several billions and not what over 1 billion or 2 billion. Whether it’s 4 billion - 5 billion, we don’t know yet. And that because the end market is growing very rapidly and I think from the Internet of Things and people now that connect to a phone, now the next explosion of a domain is when you do something, do something and you need automatic controls, those are really [indiscernible]. I see a lot of activity out there, there is a lot of small companies and are doing these kind of things. This product is a perfect for them, there is a product of family, it provides a platform for that kind of implementation.

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

Absolutely, the limiting factor is our sales marketing. Now, and it’s all possible. I think the 500 million, I see a much bigger growth on that.

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

Well, our pricing power is, the more as a solution provider, the more we can charge more. And that’s in the last four-five years, our level of integrations and also on top of it and have software and that really gains us our pricing power. And even in the consumer market segments and we’re doing really well. Our customers appreciated those -- the easily used product.

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

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

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

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

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

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

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

Thank you. And our next question comes from Rick Schafer of Oppenheimer. Your line is now open.

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

I think as the e-motion is across the boat, I mean that and also some of the new emerging market segments, so it’s big enough there. For all our business that you said 100 million, I don’t know 100 million, but in the last few years we grew 100%, we double it every year, is because of we’re small. And growing next couple of years -- in the two years out, I don’t know if we can still double it that will be lot more difficult. But e-motion is -- so far, sky is limited.

Since you mentioned it, how far out is it -- if you want to call it the tipping point? But how far out is that business from sort of hitting that tipping point, the e-motion piece, is that -- and maybe able to find out it’s maybe like a 10% revenue kind of driver, 10% of business kind of business.

I think on the consumer side, like a drone, we think generally revenue very quickly. I see a lot of emerging market like a robot, and artificial intelligence, a robot driven by artificial intelligence both are emerging. And I think I truly believe they will more and more, these are all coming. For 10% of MPS revenues -- MPS also growing and I think as we’re going to -- in the next three or four years, I think that we’re going to be -- we’d be more than 10% of MPS revenue.

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

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

Thank you. And our next question comes from David Wong of Wells Fargo. Your line is now open.

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

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

Thank you. [Operator Instructions] And our next question comes from Lina Zhang for BayRock [ph]. Your line is now open.

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

No. let me break you first. We have not increase of inventory it’s not because we have a favorable pricing I didn’t say that.

Yeah, I know.

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

Alright.

I understand. Thanks for the clarification. But if you look at your top line growth, very strong, especially is this kind of tough market environment, right. And you look at industry growth it's almost more than 30% growth year-over-year in the at last six quarters. So, my puzzle is, it seems gross margin expansion is kind of behind than this kind of two strong growths and -- or you can help me to give me the factors which is in your gross margin, was factors to decide your gross margin?

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

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

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

Okay. Thank you. And the best of luck that. Thanks.

Thank you.

Thank you.

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

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

Ladies and gentlemen, thank you for participating in today’s conference. This does conclude the program and you may all disconnect. Have a great day, everyone.