Monolithic Power Systems, Inc. (MPWR) Q4 2015 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Monolithic Power Systems Q4 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 be given at that time. [Operator Instructions] As a reminder, today's conference is being recorded. I'd now like to introduce your host for today's conference, Ms. Meera Rao, Chief Financial Officer. Ma'am, please go ahead.

Thank you. Good afternoon and welcome to the fourth quarter and fiscal year 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 are identified in the Safe Harbor statements contained in the Q4 earnings release and in our SEC filings, including a Form 10-K filed on March 2, 2015, and a Form 10-Q filed on October 28, 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, 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 through Q4 releases for both 2014 and 2015 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. Let's begin with a summary of 2015. We continued to perform as we have in the past few years. We are pleased to announce record annual revenue of $333.1 million. Our full year organic revenue growth of 17.9% clearly outperformed the analog industry, which SIA estimates grew 1.9% over the prior year. For 2015, MPS's non-GAAP gross margin expanded 40 basis points from the prior year to 55%. Further, our non-GAAP operating income grew to $81.7 million, representing a 34.8% increase over 2014 after excluding the one-time $9.5 million litigation judgment received in the prior year. We achieved record non-GAAP EPS of $1.89, 32% over 2014, again, excluding the litigation judgment. Diving into year-over-year revenue growth by market segment, industrial was up 35.3%, storage and computing revenue grew 22.6% and consumer also increased 18.2% over 2014. Let me speak to the results of each end market. In industrial and automotive markets, sales rose to $66.3 million, fueled by product sales for applications in automotive, smart meters, security and power sources. We are thrilled that industrial revenue as a percentage of total revenue surged from 6.7% in 2011 to 19.9% in 2015. With significant design win momentum in industrial and automotive, we expect to see continued growth in 2016 and beyond. Revenue from consumer markets increased to $145.1 million, driven primarily by high value consumer markets like battery management, home appliances, gaming and LED lighting. Computing revenue was up $10.5 million from the prior year to $56.6 million, mainly due to growth in cloud computing, high-end PCs and storage. Communications revenue grew slightly to $65.1 million compared to $64.6 million in 2014. Growth in networking and telecom was partially offset by a decline in the traditional gateway business. Switching to Q4, MPS had a record fourth quarter with revenue of $86.9 million, representing year-over-year growth of 14.8%. This is our 10th consecutive quarter of double-digit year-over-year quarterly revenue growth. Non-GAAP gross margin was 55%, 10 basis points lower than the prior quarter, but 10 basis points higher than the fourth quarter from a year ago. Our non-GAAP operating income was $22.5 million compared to the $23.8 million reported in the prior quarter and $18.3 million reported in the fourth quarter of 2014. Q4 non-GAAP net income was $21.1 million or $0.51 per fully diluted share compared with $0.55 per share in the previous quarter and $0.43 per share in the fourth quarter of 2014. Let's review our operating expenses. Our non-GAAP fourth quarter 2015 operating expenses were $25.3 million, down from the $26.5 million we spent in the third quarter. Our Q4 expenses were below expectations, primarily due to new product costs being delayed to Q1 2016. We have also begun investing in our infrastructure as the industrial and automotive market opportunity continues to grow. Our GAAP operating expenses were $35.1 million in the fourth quarter compared with $36.1 million in the third quarter. The differences between non-GAAP operating expenses and GAAP operating expenses for these quarters are stock compensation expense, income or loss on an unfunded deferred compensation plan, as well as a write-off of an acquisition earn-out liability in Q4. Stock comp expense was $12 million in the fourth quarter compared with $10.2 million in the prior quarter. Since 2014, we have implemented pay-for-performance equity programs. This increase in expense is due to MPS's revenue performing better than expected compared to the analog industry during this period. Q4 GAAP operating expense also included a $2.5 million credit resulting from an acquisition-related earn-out liability. In addition, Q4 GAAP operating expense included $300,000 of investment expense related to an unfunded deferred compensation plan compared to an investment gain of $500,000 in the prior quarter. Switching to the bottom line. On a non-GAAP basis, our Q4 net income was $21.1 million or $0.51 per fully diluted share. This result is computed with an estimated tax rate of 7.5%. Q4 2015 GAAP net income was $10.1 million or $0.24 per fully diluted share. Now, let's look at the balance sheet. Cash, cash equivalents and investments were $240.3 million at the end of the fourth quarter of 2015, above the $235 million at the end of the prior quarter. In Q4, MPS generated operating cash flow of about $21.7 million. Cash proceeds from employee stock option exercises contributed another $900,000. These cash inflows were partially offset by $8.6 million to purchase office space and capital equipment. In Q4, we funded the $8.1 million quarterly dividend declared in the prior quarter. We also spent about $600,000 to purchase 11,000 shares under our stock buyback program. Accounts receivable ended the fourth quarter at $30.8 million, slightly higher than the $30.5 million at the end of the prior quarter due to higher sales in the third month of Q4 compared with the prior quarter. Days of sales outstanding were up to 32 days in the fourth quarter from the 30 days in the prior quarter and the 31 days in the year-ago quarter. Internal revenues at the end of the fourth quarter were $63.2 million, down from the $67.3 million at the end of the prior quarter. Days of inventory decreased to 144 days at the end of Q4 from the 147 days at the end of Q3. Days of inventory in the distributed channel decreased for the third consecutive quarter. I would now like to turn to our outlook for the first quarter of 2016. We are forecasting Q1 revenue in the range of $81 million to $85 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 53.5% to 54.5%; total stock-based compensation expense of $11 million to $13 million, including approximately $350,000 that would be charged to cost of goods sold; litigation expenses of $150,000 to $250,000; non-GAAP R&D and SG&A expense to be in the range of $25.4 million to $26.4 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 to be in the range of 41.2 million to 42 million shares before share buyback – sorry, fully diluted shares to be in the range of 41.2 million to 42.2 million shares before share buyback. Our board has approved a $50 million stock buyback program over a one year period beginning this quarter. We're pleased to report that we've achieved all of the share price targets that were set for the 2013 MSU program. Accordingly, at the end of 2015, we've established another MSU program with a new set of share price target which includes an initial range from $71.36 to $95.57. The program spans six years with a four year performance period. In conclusion, in 2015, we continued to deliver and we have great expectations for the future. I'll now open the microphone for questions. [Operator Instructions]

Our first question comes from the line of Anil Doradla with William Blair. Your line is now open.

Hi. This is Joe Hodes in for Anil. Congratulations on another great quarter. I'm wondering if you can give us anymore color regarding the industrial segment, given some weakness you're seeing in the overall environment. I guess, in other words, what products are driving your success and how much of that is automotive? Thanks.

We are not seeing any particular weakness. And if you look at our trend, even last year, we didn't see much weakness in Q4. And this is a quarter where we continue to see momentum in industrial areas, including automotive. And one thing to keep in mind is these are all early revenues. We are not a big player yet. So if there is any macro weakness playing in automotive, you wouldn't expect to see it in our numbers.

Okay. Thank you. Okay. And then I'm moving to new products. What can we expect from the brushless motion control in 2016?

We have a lot of design win activities and we have some small. In terms of revenue, we'll have some revenues, but we expect to have in the 2017 and beyond the product start really in the growth.

So late 2016, probably?

Yeah. And even starting now, we have revenues.

Okay. All right. Great. Thank you.

Our next question comes from the line of Rick Schafer with Oppenheimer. Your line is now open.

Yeah. Thanks and congrats on a nice quarter, you guys. It's tough out there.

Thank you.

Maybe I've got a question on your auto business. I mean I think you've seen your auto business double annually for the last couple of years. What's that trajectory look like this year? Can we kind of stay on that same kind of slope? And maybe part of that question is, is this auto growth primarily going to be coming from sort of infotainment where you guys are pretty strong now or is it going to be coming from a combination of areas? I mean are you going to be ramping in areas like drive train or ADAS or other areas within the auto?

Yeah. Rick, thanks for the comment. And the growth in the automotive is pretty consistent because unless the auto company cancel the design of a car, okay, cancel the entire project, that doesn't happen very often. So we have many design wins and started a couple years ago. And also, with the right product and particularly for design for automotives, we are very optimistic for the next period. And related to what kind of a product – what kind of application in the car, except in the engine, except under the hood, we are almost everywhere now. Meera, you can -

That was my point basically that except for the power train that we started in infotainment but then we've gone into the body, into safety, into various different applications.

Got it. And then by region, is there anything – I mean I know you guys are strong in Europe. Have you seen -looking at your backlog like you said, Michael, you've got good visibility there. Are you starting to see areas like Japan or North America or any other place start to pick up?

North America, China, Korea, definitely picking up, other than Japan. In Japan, we have some. And they are much slower than any other region. It is not because the market is stagnant. It is because of MPS's salespeople. We already corrected that in the last – two years ago.

Got it. Got it. And then my second question is on E.MOTION. I'm curious like what milestones we should be looking at this year. It sounds like revenues would be pretty small. But I guess maybe my real question is what's sort of the biggest hurdle to that business ramping? I think we've talked about it being a $2 billion or greater TAM. I mean is the biggest hurdle just scale? I mean do you guys – would you ever license that IP or would you ever think you need a partner to ramp that business? Or I guess maybe just if you could give some color on what that business looks like in the next year or two years?

Yeah. Next couple of years still we'll see a slow growth and you will see accelerating after probably 2017 or so. And all of these things that we're talking about really changing how you design the – how do you control the motion, how you design the model drivers. And these ones is really a long-term. And MPS doesn't focus on a very short-term business. If anything goes up fast then it comes down fast. And so we focus on these longer-terms in the sustainable market segments. And so far, there is no surprises and everything has followed plan. I mean, everything is executed well. So we generally have some revenues from some strategic customers and we work with them closely. And the larger market segments will – and our revenue will come in the 2017.

And, Michael, would it mean anything to think about like what your two-year or three-year backlog is for that business or is it just way too soon to think of it that way?

No, it is not. Okay. We focus on the – as we said, okay, industrial robot, that segment is growing and also the very mature market is the printer market. And using our technology can revolutionize the way of printing. So, not only in the office paper printing, also textiles and fabrics and photos, all of these. It can increase the speed just dramatically. And these are the market, TAM is easily is over $1 billion, okay, just for this printing segment.

Got it. Thanks a lot.

Okay.

Our next question comes from the line of Tore Svanberg with Stifel. Your line is now open.

Yes. Thank you and congratulations on the results. A few questions. First of all, I know you typically don't discuss backlog or bookings or anything like that, but could you just talk about your relative visibility now versus perhaps a year ago?

I think our visibility now is the same as it was about a year ago. We had good bookings coming into the quarter, continue to see – orders continue. We had good resales last quarter. So we are actually seeing good activity from a backlog standpoint.

Tore, you know us for – you've covered us for many years and, of course, since the beginning. And you know that our turns business is less and less and especially in the last couple years, okay. Going through the quarters is now much more predictable now.

Yes. Which I think also explains the very consistent performance for the last few years. My second question has to do with SSD. How will that play out for you this year? I know last year that was a pretty strong business for you. And are we – I assume now we are for sure – we have crossed over SSD versus HDD as far as your power management revenue?

The SSD – we have all the designs that we have. There's additional sockets with existing customers and we have a new customer who started buying our SSD products last year. So with all that, we do expect SSD to continue to grow. And yes, SSD is now the bigger part of – has crossed over HDD at this point.

Okay. And moving on to your server business, I know Grantley or VR12.5 and also Purley are going to be strong catalysts for you. Any updates there as far as timing is concerned?

I think they are – ramp up, all right.

Purley is Q3, Q4 of 2017.

Yeah.

And as far as I know that schedule is still on. The design cycle for Purley is still going on. And as we told you at the Analyst Day, we are seeing very good progress over there. We are much stronger in Purley than we were in Grantley.

Yeah. All these cycles we designed in a couple years ago and nothing has changed. And they are just waiting for the cycles to begin. But more exciting thing is that we gained a lot more socket and we established as a player in that segment.

Great. Just one last question from me on battery management. I know you have a single chip solution there and you've already gotten some good traction but any new applications that you could share with us that you have penetrated with your single chip solution for battery management?

Well, we have a lot of things going on, I mean. But the one in the analog space that really pay attention to it hasn't released it yet. And we are still working on it. But everything else is just normal.

Okay. Actually I did have one last question. Could you just clarify a little bit what you said about the stock option program, especially on the pricing?

Sure. We had an MSU plan that had been set before that had price targets that ranged from $43, I think, to $40 to $56. And since we have achieved all those price targets, we now have a new program. And that has got the initial range of – the target prices is from $71.36 to $95.57. So there is a four-year performance period for this. And then between vesting and sales restrictions, it extends another two years.

Okay. So this is basically just an update to the older version?

I mean it's conceptually. But I think there are more – it's a new plan, but, yeah, it's not an extension, but it is a new plan.

Got it. Great. Thank you so much, guys.

Thank you.

Our next question comes from the line of Quinn Bolton with Needham & Company. Your line is now open.

Hey. Just a follow-up actually on Tore's last question there. You had restricted stock plan. Does the stock have to hit those levels for those RSUs to vest or to be awarded?

Yeah. They have to be at that, I think, for an average of 20 trading days for it – consecutive trading days for it to be earned. But then, even if it's earned, it doesn't vest until the fifth year and sixth year.

Okay.

There are operational goals as well. This time, there are operational goals in addition to the price targets that have to be met.

First how we set it up is – I know, Quinn, you just covered us not very long ago. We had a program and the stocks during the close is about at $30 levels. And we set up the programs for some $40 to high $50s. And that program is only – had only one measurement and it's the stock price. And when the stock hit, then we have some period of vesting. And now, this time, we have a similar program and they're using stock's price as one element but we also add also the performance element to it.

Understood. But I was just trying to confirm that you're aligning management employees RSUs with shareholders and that the stock has to go up for those RSUs to divest or to be earned.

Absolutely.

Absolutely. That's what.

That's what I was trying to confirm. Okay. Great.

Yeah.

And then just looking to the business – I apologize because I missed some of the prepared comments. But it looks like the computing or storage and computing was probably down by the greatest percentage sequentially. I know you have very strong third quarter which I think reflected the ramp of a new SSD program. Should we think December is kind of just coming back more of a normal run rate or is there something in particular that happened in storage and computing in the December quarter?

If you remember the beginning at the last earnings call, we had called out the fact that we were seeing some weakness in the SSD. We had expected to see some seasonal decline in the SSD for client, but we had also seen some softness in demand, both HDD and SSD enterprise. And I think it's more a reflection of what was happening in the macro and how it impacted some of our customers in those markets.

Based on answers to some of the earlier questions, it sounds like your backlog and bookings activity has been fairly healthy. It didn't sound like you were seeing much impact from weaker macroeconomic conditions. Is that storage and the HDD, SSD comments really the only place where you'd seen any impact from macroeconomic conditions on the business?

That's the only one that I could see anything clearly. I mean the rest of it – we're kind of listening to more to what our peers have to say about macro because we are still seeing good bookings and billings.

Got it. Great. And I just wanted to ask. I know you had a lot of longer terms drivers in E.MOTION and it's early ramp that really starts to kick into more significant revenue contributors in 2017 and beyond. But as you look at 2016, can you sort of list for us on a product basis maybe what some – maybe the top two or three growth drivers would be for 2016, again, from a product perspective?

Sure.

I can comment on it. And this year's 2016 revenue, especially all these growth drivers and these products are released about two years to three years ago. One is obviously in the auto segment and the other one the cloud computing, the high end computing. That's including some workstations and high end notebooks and also the servers and data centers. And other one is the industrial and industrial is not as good as the last year's. It's similar, right.

Industrial is going to be doing very well.

The industrial is about -

Yeah.

And so we have many actually. And we have many segments. What else? The consumer side – the high-end consumer business and we released a lot of product for mobile and for ultra-low power application and also a variety of product for the Internet of Things now nobody talk about anymore. Those products actually we started to do in 2011. Those products are actually doing really well now, because we see many applications in the connectivity that requires those products. And this year we're doing really well. Any other segment I forgot?

No. The three I would emphasize would be industrial, storage and cloud computing and consumer, particularly the high-end consumer.

And also auto, right?

Auto is included in industrial.

Okay.

And, sorry, last question from me just on the high value consumer. I think last quarter you said that that was approaching 40% of the total consumer bucket. Did that reach 40% or does that continue to increase here in the December quarter and as you look into the March quarter?

I don't know the percentage of total revenue. We don't know – I don't know what that number is because the other segment will grow faster and consumer probably grow the slowest. But revenue-wide, I don't see what decrease was. We'll continue to grow.

Year-over-year, I would say that the high value consumer is continuing to be a bigger portion of our consumer revenue. But if you're comparing quarter-over-quarter, there would – since Q3 was a much stronger – seasonally stronger quarter for consumer that would impact our high value consumer revenue as well. But year-over-year what we're seeing is even if you look at a quarter or year-over-year, we are seeing bigger portion of consumer revenue coming from the high value consumer market.

Okay. So you continue to mix that high value consumer. It's what I was trying to get at.

Yeah.

Yes.

Thank you.

Thank you. Yeah.

Our next question comes from the line of Ross Seymore with Deutsche Bank. Your line is now open.

Hey, guys. This is actually Matt Diamond on Ross' behalf. Thanks for letting me ask a question. Your comms business is upsided really nicely it seems. I'm just curious to get your thoughts on the stability of the comms market. We've heard from some of your peers that things seem to be stabilizing and I just like to get your own thoughts on what to potentially expect for the first quarter and beyond?

Sure. In comms, I would say networking and telecom was relatively flat with the prior quarter. Most of the upside that we saw was in the gateway business where we had – if you remember a quarter before, we had seen weakness. So if I look out into Q1, I kind of expect from a networking and telecom that it will be flat. And Q1, on the gateway business, it would depend upon how the macro plays out. If you remember, the gateway is an area where it's not a strategic focus. It's something that we play in opportunistically depending upon the margins for the orders that we receive. So my expectation is that the gateway business is going to be flat, maybe even slightly down.

Understood. And you mentioned some OpEx commentary about new products cost being pushed out to the first quarter. I don't want to make you guide beyond the first quarter but directionally is there anything abnormal or irregular to call out about OpEx for the rest of 2016?

Sure. What we were talking about there is, remember, we had been talking about the new foundry that's coming up. And we had identified the cost of bringing up the new foundry at $3 million. This is between the MOSFET cost as well as the wafer development loss. And we ended up spending only about a $0.5 million in 2015. So we'll be spending about $2.5 million in 2016 on that. The other thing that we also commented is that we have begun our investments in industrial and automotive markets. And so that is going to be something that's going to be driving OpEx expenses this year.

Great. Thanks very much.

Yeah. Let me comment on the expense side. It is clearly – okay, we have a very outstanding product for automotive and industrial. And it's – our quality is exceptional. However, we need investment in the systems – in the quality systems. And those one – MPS just have those products just by brilliant design engineers and our peoples. Now, we need to invest in the infrastructures. And there's a lot to be done in there which will overall elevate the company's quality. And so, in 2016, it's time we should do that. But we do – and it depend on how much – how much is really depending on what MPS's growth rate. And during the Analyst Day last year, I said that with our growth – our OpEx always grows a little more than half of what the revenue growth. So this year's will be just slightly higher and also we are really controlled depending on the revenue growth.

And just a reminder, we talked about revenue growth. Our OpEx growth rate would be 50% to 60% of the revenue growth rate. And while we expect to be a little higher this year, that does not include – that 50% to 60% we were talking about does not include the new product cost for the new foundry coming up.

Got it. It makes total sense. Thanks very much. I appreciate the clarity.

You're welcome.

Our next question comes from the line of Steve Smigie with Raymond James. Your line is now open.

Thanks. This is Vince Celentano on for Steve. So I start with your LED business. It looks like it's up almost 20% year-over-year in the quarter. Can you talk a little about what's led that outperformance so far and where you see that market going in 2016?

If you see these fast trending products, we are very just opportunistic. And it may come in. It may be more, may be even less. Okay. But these are not our core interest. But we do have underlying very solid LED product customers. These are really for the decorating lighting, industrial lightings. And if we have a fast-grow revenue, we're just very opportunistic to take those revenues if we have the capacities.

Okay. Great. Thanks. And then, can you give any color on upcoming DC5 as far as how it compares to DC4 either in performance or does it target different applications? And then more broadly, how do you see BCD as far as how it compares to competing solutions?

While competing with a competing solution, I don't see anybody that's come in and have anywhere close to what MPS have. We are leading by far. Okay. In the past talking about a few years, a couple years, I think that's even much further now. And so BCD5 and we have a first few products in the market. We are launching it now in the market, meaning with all of the probable features in it.

One of the key things I'd also add for BCD5 that makes it special is that we've also added memory and digital capability.

Okay. Great. Very helpful. Thank you. [Operator Instructions]

Our next question comes from the line of David Wong with Wells Fargo. Your line is now open.

Thanks very much. Just a clarification of your earlier answer. You noted slight growth in communications for the full year 2015 but communications revenues if I calculate correctly were down about 10% year-over-year in the second half of the year. So was all this driven by declines in the traditional gateway or did telecom and networking or any other sub-segments of comms also dropped in the second half?

I wish we have all the other infrastructure business. We don't have that much, okay. So the rest of it was explained already.

Also, to add to that, the networking and telecom area has been doing well right through the year. So the weakness in the second half was more attributable to the gateway business which is an area like I said we only play in opportunistically. If the prices are attractive then we will take that business. Otherwise we may not take it in a particular period.

Okay. Great. Thanks.

And I'm showing no further questions on the phone lines at this time. I'd like to turn the call back to Meera for closing remarks.

I'd like to thank you all for joining us for this call and look forward to talking to you at the Q1 earnings call. Have a nice day. Bye-bye.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. And you may now disconnect. Everyone, have a great day.