Monolithic Power Systems, Inc. (MPWR) Q1 2012 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Monolithic Power Systems, Incorporated Q1, 2012 Earnings Conference Call. [Operator Instructions] As a reminder, today’s conference call is being recorded. And now, I would like to turn the conference over to your host, Meera Rao.

Thank you. Good afternoon, and welcome to the first quarter 2012 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. These statements will cover a number of areas concerning our business outlook, including: our business and financial outlook for the second quarter of 2012, Our expectations for second quarter litigation, stock-based compensation, and GAAP, and non-GAAP operating expenses projected second quarter revenues and gross margins. Our target operating ranges for gross margins and inventory, our expectations for revenue growth and gross margins beyond Q2, 2012, our expected average tax rate for 2012, Our belief regarding the outcome of a pending IRS audit, our belief that MPS is well positioned for future growth. The expected seasonality of our business, our expectations for future product cost reductions, and new product introductions, potential customer acceptance of our products and opportunities these present and the prospects of diversification and expanding our market share. Forward-looking statements are not historical facts, or guarantees of future performance or events, and are based on current expectations, estimates, beliefs, assumptions, goals, and objectives, and involve significant known and unknown risks, uncertainties, and other factors that may cause actual results to be materially different from the results expressed or implied by these statements. Risks, uncertainties, and other factors that could cause actual results to differ are identified in our SEC filings, including, but not limited to our Form 10-K filed on March 12, 2012, 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…

[Operator Instructions] Our first question comes from Vernon Essi with Needham & Company.

I was wondering if you could go over your - I guess, for my purposes just your capacity that’s available out there and can you give us a rundown of sort of who you are using to ramp your production and what sort of availability you have, I mean you’re on a nice trajectory here, and I guess also just in line with that, you had given us an update on your BCD, I guess rollouts from BCD-3 or BCD-3 Plus and BCD-4, if you could go over that sort of how that progression is taking place, maybe appreciated.

Okay. We don’t have a capacity now and we disclosed the last earnings call we added another foundry with a much more advanced equipment. And with the BCD-3 product we strengthened, I’ve always said, we strengthened it by a huge amount, more than 30%, 40% of die size. Our - even our existing foundries we couldn’t fill it up, because number of the wafer dramatically reduced. So we don’t have any capacity constraint. And audio represents the technology for BCD-3 product, the third generation is now in a converting phase and BCD-4, the fourth generation we are trying to release at the end of the year.

So you’re still qualifying BCD-3, 4 - I’m sorry, BCD-4 with your customers, you’re in-production ops in BCD-3 and I realize that of course your die size is smaller, but I guess my question is the technology you’d brought in another foundry partner, I remember that, and what I guess I’m asking is how is the capacity with that partner and do you feel that equates to…

That will add another more than $100 million.

Yes, so we have more than enough capacity for the foreseeable future.

Okay, I’ll move on, then congrats on the Vcore situation on the grandly[ph], and I just - obviously you had talked about this a long time ago and now that you’re in a reference design scenario, can you give us an understanding on how that revenue would ramp and sort of when you would start to see the first opportunity to recognize revenue on that?

This is very - we disclosed that information on the - on grandly because this is a milestone for MPS. And MPS is always in the analog side, we don’t have a digital, now we have a digital capability and it took MPS more than a year or 2 to do that and that’s a milestone. In terms of our revenue, this is - grandly is really a 2014 volume. So now, we are engaged with our customers and therefore designing process now.

Okay. And then my final question, if you could explain on the consumer side, you have sort of migrated away from that and you still had a very strong quarter in consumer especially on a sequential basis relative to your peers. Can you discuss - you put a lot of things in that bucket there and even some handset revenue, can you discuss sort of what seems to be the strongest driver in that bucket and why it’s not seeing a seasonally slower downtick?

We had told you last quarter that we had got -- gained a lot of market share in set-top boxes, so we saw stronger revenues from set-top box in the quarter and we also saw a stronger demand from a whole lot of general purpose consumer products. And I think a lot of it is the new design wins and some of the market share that we have been gaining in this market.

Okay. And so if we go through the rest of 2012, especially as you get into the back half of the year, you obviously would expect consumer to tick up as a percentage of your revenue going into the back half of the year, in other words it would certainly be well north of 50%, perhaps approaching 50% again as you exit the year, is that a fair statement?

We expect to have a percentage, we expect to remain the same level of slightly lower in other market segments picking up, but the revenue dollar, it will be - will have a modest growth in consumer area.

Our next question in queue comes from Ross Seymore with Deutsche Bank.

On the gross margin line, given just a stereotypical assumption on mix and what would be good and bad for your gross margin, I’m a little surprised at where the growth came from that the gross margin actually was down a little bit sequentially, can you just clarify to us how we should think about mix, whether it’s by new products or by end markets?

In the second quarter?

In the first quarter.

Okay. Our first quarter mix - product mix came in lower, it’s a combination of products and customers and it’s largely because of consumer and a little bit of the low end computing as well.

But going forward…

Pardon.

Go-ahead, ma'am.

By low end computing, I ‘m talking about laptops, notebooks et cetera.

So if we think going forward, as Michael just answered to the previous question about consumer as a percentage of the mix, if Thompson Industrial become a bigger part of the mix, I assume those are the richest gross margin area much like your peers, is that how the mix related dynamic works in your business model as well?

Yes and that’s the truth. But the industrial revenues and the contribution of the gross margin from industrial is rather small for MPS at this time because the overall industrial revenue is not as big and more in communications and a computing from a - especially from a new generation product for the computing area.

And I guess is a - it’s a follow-up on the gross margin line, as well as - if I remember correctly you had underutilization charges and so you got upwards to the $60 million or $61 million in revenue away from the mix side of things just from a fixed-cost coverage perspective. Can you just walk us through in fact still the bogie on where those underutilization charges disappear and if so how should we judge the magnitude of what they were in the first quarter and how do they go down going forward as you grow?

As we explained before, there was a 300 basis gross margin hit that we took back in Q4 2010. And so as we grow that we get some of that back or we get some of the gross margin improvement out of it. But one of the things to keep in mind is we'll always be balancing revenue growth with gross margin growth.

To answer your point it’s due to do same formula. We view the capacity around $70 million so it’s still running at the $50 million range, so it still have a lot of room which we include.

Great. And I guess this is the last question a little bit more housekeeping. What tax rate should we think about for the rest of this year?

I would say between 5% and 10%.

Our next question comes from Patrick Wang with Evercore Partners.

I know you’ll recently talked about this that your sales guidance was very strong, can you give us a sense of how your booking trends were, perhaps I guess a linearity or shape over the quarter, I know you said that it was strong throughout the quarter, but could you give a little more color there? And then also you entered last quarter with a lot of backlog coverage. If you could also give us a ballpark on how much you’ve got heading into Q2?

Last quarter was an exception, it’s typically a down quarter and we were projecting revenues to be flat to up and so as an exception, we shared the bookings number. For this quarter, I’ll just say that we entered the quarter with good bookings and we are comfortable with the quarter guidance.

Okay. So I mean should we think about that as - looking as more of a typical quarter that we see in the past with MPS?

It is a typical quarter, yes.

Typical quarter, okay got it. Great. And then also I want to follow-up Ross’ question on gross margin. When we think about margins over the course of the year, just the way that you guys have guided revenues for the second quarter and it almost feels like we should really sort of approaching something in the 60s and the back half for the year. And if we do that what’s the best way to think about the margin progression over time. And I guess you know it’s just when we take into account the underutilization surcharges and I guess may be for 6 quarters ago you guys got hit on higher wafer costs as well?

Well, as I said earlier than the consumer - the percentage of a consumer product will go low. And that overall dollar will still go up. So overall margin as the revenue grow it should go up slightly. Although, we don’t want to emphasize the margin only. We want to have a balanced growth between the growth margin and also the revenue growth.

Okay. So is it fair to think about as we approach 55% margins, is that - do you want investors to think about that or is it more kind of 53% to 55% is a healthy range and looking to maximize top line growth?

Yes. We - our current models do have 50% and a 55%. So we’re so in the middle now and as the revenue grow in the euro expected, we will go even higher. But we - at this time, we are not changing our model.

Okay. Great. And then also we’ve been pretty excited about an opportunity with MPS ramping at a big comp equipment supplier out there. I’m just curious if you can give us an update on some of the key milestones, the sampling that the power module and if any of that is actually baked into your Q2 guidance?

No, the modules and we are actively engaged with our customers. So we have a conference call with them every week and for the progress of the project and we don’t expect any revenue in the second quarter and/or even third quarters.

Our next question comes from Steve Smigie with Raymond James.

Just a follow-up a little bit more, you guys had a very strong result here on the first quarter and a very good guidance. How can we think about seasonality this year given that typically Q3 would be very strong from you? So first while you’re moving more towards networking business and other area is industrial that you probably means you will have less of that seasonality going forward, plus you've had 2 above expectation quarters. So how should we think about that seasonality this year and next year we have more of that mix in your business.

That’s a good question and we try to figure out what is seasonality and also relating to next couple of years - financials and the unstable market with our new business. And we really can’t tell in the - that the close to 50% our business still in a consumer side. So I would still expect to have a very - a similar trend, but not as much - now - we don’t have a typical pattern anymore.

Okay. So probably wouldn’t be fair to sort of model a big drop down in Q4 and then even bigger drop down Q1 anymore should obviously would that out that fixed?

Well, we never had a Q4. We have our Q3, we have always have a big Q3 and a Q4 slightly down, even or slightly down and I don’t see and really depend on [indiscernible] market and also the computing market and what Q3 will be and we are still contemplating, but at this time too far away to say it. But overall I expected the things that new product designing activity happened in the last year and I expect the revenue continue to grow.

Okay. Within the operating expenses, can you give some color on what the mix would be as a percentage wise, dollar wise, SG&A versus R&D and talk a little bit about R&D spend over the rest of the year. Is it certain dollar amount you guys are looking to spend for the year? That's the question.

Sure. In terms of the OpEx, R&D we’ve got all the headcount on board. So any increase would be associated with new product releases, math sets and development wafer large things like that. With regard to sales and marketing, we just hired a new sales and marketing executive and we’ll be adding a few more as we find them. So, I would expect salaries to increase a little bit and then we would also have variations, I would say sales commissions could go up and down along with revenues.

Okay. So I should think that you probably see much faster ramp in SG&A going forward and then R&D dollars just really have to spend in place the dollars probably will ramp that significantly.

Yes. And even SG&A, the ramp is not going to be that significant but there will be an increase.

Okay. And last question, with regard to the new products coming out, can you help us think about how we should be looking at ASP and units. Feels like the ASPs got to be going up a lot, does that mean units go down quite a bit as well because again you are moving away from those higher volume markets?

That’s true. We have all the computing product and those are the new generation with computing product called out high ASP and also for storage and the new generation where products like SSD and HDD are higher price, will have - those products have a higher content.

The next question comes from Rick Schafer with Oppenheimer.

This is Shawn Simmons calling in for Rick. Congrats on the good quarter and guide. I have just a couple of questions, quick on your set top box business, can you guys just talk about where you are taking share just geographically?

I think all over the place in Europe, U.S., Asia.

Okay, great. And then, can you give us an update on your past auto design wins? I know you guys got pretty good traction in Europe and then one design win in Asia last quarter, did you pick up any incremental share there or do you have any further color on that?

Yes, we do have some design wins in the U.S. mall - in the U.S. market although we are not really qualified for big 3 automakers, but we design it in those component makers.

Okay. And then I guess just one last question for me. I guess, what do you expect to do with internal inventories? Do you guys expect to take them up here quarter-on-quarter as you built for a seasonally kind of stronger second half?

Yes, we expect to increase in-house inventory levels. It will be getting closer to our in-house inventory models that’s may be goes slightly short of that.

[Operator Instructions] Our next question comes from Tore Svanberg with Stifel, Nicolaus.

A few questions, first of all, you had converted to BCD-3, what is the percentage now and where would you expect that to be by the end of the year?

BCD-3 and currently we are converting all the product based on the BCD Plus, BCD-2.

Plus to BCD-3.

To BCD-3 and BCD-4, the fourth generation we’re planning to release in production at the end of this year.

Okay. And I guess you have a --the reason I'm asking the percentage question is because that I’m trying to understand the impact on gross margins. So at the end of the year, would you have a pretty high percentage in BCD-3?

That’s correct.

Okay. Very good. And you talked about the grant in the design win then I understand you’re not going to get much revenues until 2014, but when would be the release you could potentially announce a design win there?

Yep. You’re talking about BCD-3.

No, no. Now, I’m talking about the Vcore design win for grandly.

These are - yes, we do have - we can’t call a design win because the production day is a little further away. And but certainly many leading manufacturer needing supply from the - in the server market, they’re very interested in MPS solutions.

Very good.

In fact, right after Intel sent out the approved vendor list, we got a lot of request from customers asking for samples and boards.

Very good. You guided legal to be - legal expenses to be $100,000 to $300,000, is that sort of the new run rate now going forward?

For the rest of this year, we kind of expect it to be at that rate.

Okay, very good. And you had a little bit of a step up in CapEx. Is that it for now and now we’re going to be go back to sort of $2 million, $3 million?

Yes. I think we’ll see another quarter with CapEx will be up and then they will be back to the usual levels.

Okay. And when we talk about communications, I think you mentioned telecom as a narrow that’s big for you guys. I didn’t think that was a pretty material business for you. I mean I should still think that in comp it’s primarily networking right?

Networking is the bigger champion. Yes.

I’m showing the next question in queue is a follow-up from Vernon Essi with Needham & Company.

Thank you very much. And I apologize if you had already addressed this, but what is the update on your outlook for the LED lighting market and sort of how you guys progressing and I guess give us the landscape of where you’re seeing the most traction right now?

Well, we have a - we had a product that it have with a little problem, where I mean and we corrected that and so we got a design win now, we got a design win, we got a multiples which called a multiple design, design wins after we release this product in early - just at the end of the last year. And so we will have an enough - a meaningful revenues from LED lighting in this year.

Okay. And so should we’ll be looking at I mean you’ve historically broken out this revenue with lighting controls and some of that’s probably, we spoke of that could still be sort of in the computing area, correct?

Actually, if we have continued to breakout the revenues by product type as well as DC/DC and wireless, but what you see is lighting control revenues includes both LED lighting, as well as backlighting revenues.

Okay. But I mean is it fair to say when we look at that $6 million number for the first quarter, is that - like what would be the split of that between monitor based revenue versus general lighting?

The majority of that would be…

Monitor business is about a round of portfolio of $5 million to $6 million right.

Yes.

Yes. So and this year, the Monitor business is still - will be very strong as we’ll release a new product for that market. And we also see the lighting business will grow too.

Great. So let me just back up. You’re expecting the growth you will see in 2012 would be contingent upon your success in the general lighting market, I mean is it a monitor market or the computing market expected to grow at all for you or is it sort of flattish?

Yes. Those are well growth.

So we are focusing on growth from the lighting market.

Thank you. And I show the next question is follow-up Steve Smigie from Raymond James.

So it seems overall that the not specific view, but the TV end market overall seems to be maybe finally getting a little bit better. Do you still have product there that could grow and any chance that some of the big guys over in Korea would be talking to you about, again about any products you have out there?

Well, we did that in the 2010. We did a lot revenues and I mean in a TV mark - 2011 loss a lot of revenue then in a market - in the Korean TV market. And now the overall TV market we - I think it’s 2010, and our revenue is only - is about a 30% and in terms of overall market we’re still a small, it’s not a dominate player like 20%, 30% of our total market share. So without the Korean - major Korean TV makers and so our percentage is a much smaller now and with [indiscernible] and with the crew product we released we’ve released in last year and we expect to gain some shares and although and that’s not our focus.

Okay. And I’m sorry if I missed this somewhere, but you appreciate you guys giving the end market breakout very helpful. I think when you gave us Q1 I think you gave comparisons for Q4 and Q1 a year ago. If you have guys could put on the website Q3 and Q2 if it’s not familiar in the press release that I missed it.

I can give you the Q4 and the Q1. Again we already gave Q1 2011. I can give you an approximation of the Q4 2011 if that would be helpful.

Sure. I think you gave Q4 2011. I could be wrong

I’ll just - I gave it in the script, but let me just walk through it one more time. Communication is about 23%, computing about 18%, consumer was 52%, industrial is about 7%.

Right I appreciate, I just take there is point for Q2 and Q3 and it’s only if important that you send that information out.

Sure, Q2 communications was 24% in Q2, 23% in Q3, computing was about 14% in Q2 and 17% in Q3. Consumer is about 57% in Q2 and 53% in Q3. Industrial is about 6% in Q2, and about 8% in Q3.

I’m showing no other questions at this time. I’d like to turn the program back to management for any concluding remarks.

Thank you for joining us on this call. Look forward to talking to you again next quarter. Bye-bye.

Ladies and gentlemen, thank you for joining today’s conference. This does conclude the program and you may now disconnect.