Monolithic Power Systems, Inc. (MPWR) Q2 2012 Earnings Report, Transcript and Summary

Good day ladies and gentlemen, and welcome to the Monolithic Power Systems’ second quarter 2012 earnings conference call. At this time, all participants are in 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, this conference call may be recorded. I would now like to turn the conference over to Ms. Meera Rao, CFO. Ma'am you may begin.

Thank you. Good afternoon, and welcome to the second 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 third quarter of 2012, our expectations for third quarter litigation, stock-based compensation and GAAP and non-GAAP operating expenses, projected third quarter revenues and gross margins, our target operating ranges for gross margins and inventory, our expectation for revenue growth and gross margin beyond Q3 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 expectation for future cost reductions and new product introduction, potential customer acceptance of our products and the 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, and Form 10-Q, filed on May 08, 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…

[Operations Instructions] Our first question comes from Steve Smigie from Raymond James.

I know obviously the macro is a little bit soft here, so I understand the flat guidance. Can you help me understand the implications of that for the December since we didn’t see the seasonality in September? Does that mean you are also likely to not see the negative seasonality in December so could that be potentially flattish I know you can typically kind of low quarter but since unusual quarter?

Our seasonality in the last two or three years has been not reflective of what we consider a normal seasonality, so Q4 is a hard one to call because I don’t know what the macro conditions are going to be in Q4, but when I say we do expect that on some of the newer product revenue stream we might see some early revenues in Q4 all-in-all how the different trends are going to play off we don’t know at this point.

If you could talk a little bit about your graphics and storage products I think in some of the products we are to see some earlier ramps relative to some of the others how meaningful that could be in September and back half of the year and so the profile how should we think about that into next year?

Echoing back Meera now just said it, and we see that Q3 was a very optimistic and until the third week of June. And suddenly all there are slowdown, some of the stuff even pushed out but as I said in the last conference call, in the future revenues, and that particularly in the second half of 2012, because we have all these designing activity should hit the inner revenue stream. So we have we mentioned as key market we have the HDV market and in some of the industrial and offline EV power product lines, they all are going to show some early revenue in stock from Q4. And so, but that’s the way we see it and that’s what our customers forecast and what the revenue rate will be and so until then we know it.

Our next question comes from Tore Svanberg from Stifel, Nicolaus.

Could you talk a little bit about the BCD3 process? You know, what sort of percentage of products right now in production and can you also comment if BCD4 is still ready for Q4 launch?

BCD, we are still converting from BCD2 to BCD3 technology. I don't know exactly what the percentage, maybe it's 30% to 40% and Meera can give you a better contribute.

Sure. As you know, we introduced BCD3 for office last year and such products went into production late last year. So we have started shipping, landing revenue on the BCD3 process. We've seen a significant portion of our design wins all on BCD3. Our new product offerings are also on BCD3. So we are well positioned to see a ramp in revenue from BCD products in 2013?

And then, could you just talk about your relative visibility, I mean I know you usually don't comment on backlog and bookings and things like that, but just so we understand how the linearity has progressed you know, how do you feel right now about the flattish times for the third quarter?

You mean the second quarter?

For Q3?

For Q3. The Q3 as I said earlier, [demand] in the third week of June which is, we realized that it's not as good as we thought. So, going for the future in Q4 and beyond we remain very optimistic.

I will just add to that. In terms of a backlog, we had a very good backlog and we are comfortable about the quarter’s guidance.

Our next question comes from Patrick Wang from Evercore Partners.

On my first question, I want to follow up on your comments there. You know, it sounds like things softened in the back half of June, can you talk about how things have looked thus far in July and then, Meera, you said that you saw felt fairly comfortable with the guidance here today. I guess help us walk through the thought process behind the guidance here because you know, it seems there if things continue to be soft today, then perhaps should we not really expecting [indiscernible] business?

So, let me speak to that a little bit. We saw softness in the second half of June in the consumer area, particularly in set top boxes and TV. We also saw some softness in our gateway product revenues. So we've taken that into consideration when we came up with a guidance. We still see strong growth in our new product stream, things like Storage, Lighting, Automotives. We still see growth over there, but this is a quarter where typically we would have seen a lot of growth coming in from set top boxes, TV and gateway. So those are the three areas where we’re not seeing the strengths that we typically would have seen to take us to a higher quarter. In fact some of the growth in the areas that I talked about, the new revenue streams are actually offsetting the decline that we’ve seen in the consumer and consumer light markets.

Yes, and usually the consumers and the gateway, those are products that have a very fast turn business. And we don’t see the very long-term booking.

In terms of expectation, from our perspective, the markets got soft in the second half of June and this market has an ability to go soft or pick up within a space of week. So we’re being conservative as we typically are and are guiding it to flat essentially.

Thank you. Our next question comes from Ross Seymore from Deutsche Bank.

Meera, can you just walk us through or Michael, what percentage of your sales do you now deem to be in product versus the legacy product?

I think at the moment, the bulk of our revenues are sales from the BCD2 or BCD front. We've just started shipping on our BCD3, but based on our design wins that we’ve seen out there, we expect a larger portion of the 2013 revenues to be from BCD3.

It was strictly say based on the BCD2 and I think the BCD2, we rough estimated that it would be some way of 70% and if the continuous effort to change the - to upgrade BCD2 process to a final version of a BCD3, and the full BCD3 as we said it, we used a die size by far a certain percentage, by 50% and those who bought products by hitting on the market and I think last year, third quarter of last year and those products my guess will be like a single digit of a percentage. But in between other ones like a backlight product we released last year summer time and it’s sort of in between. So overall the rough number is probably 30% to 40% and 20% to 30%, then well going forward, all the product will be based on this BCD3 and which is all using the mesh connect in network and also the technology with a 40% shrink.

Okay. And I guess there is my one follow up switching just a little bit related to earlier question. If we just assume that the fourth quarter is, I don’t know kind of down 5%, been kind of a historically normal range, Meera, can you just talk us through what some of the puts and takes would be on both gross margin and OpEx, again not so much guiding in revenues. I know you are not going to do that, but assuming down 5, what would those two lines of your income statement be?

Were you asking me hypothetically if our revenues were to go down 5%?

Yes, it’s 5% sequentially, what’s the percentage of new product, mix, those sorts of things, how does that help or hurt gross margin in that and I don’t if there is any seasonality here out as well?

I would expect gross margin, with a 5% decline, I would expect our gross margin to be flat to maybe be slightly down. It also depends on how much of that early revenue we get in, if it is in the hundreds of thousands of dollars, it may not have as much of an impact. If it runs in the million of dollars, then I think it could have a bigger impact on gross margins.

Yes, as for the utilization of course, if that's a negative, that is a negative side and it's not the medium line and if you drop to 5%, you will see a volume of that percentage as we talked about in our prior quarters and so what Meera just brought that up, the new product mix and I feel very strongly optimistic in the second half of this year and the new product will rank and bodes well with our high gross margin. So if you for pure modeling purpose, we will be slightly flat or flatly there.

Our next question our next question comes from Jaeson Schmidt from Craig Hallum.

Just Meera, wanted to get your thoughts on what you guys think that you see the inventory situation is and just overall inventory in the channel and then secondly how should we look at litigation going both for Q3 and Q4 and then into 2013?

Inventory in the channels, we are off a little bit. We were in the low end of a range and again the increase in inventory has largely been in our gateways and set top boxes and TV; while we have really tried to the extent possible to keep it at this level and so that's without any further deterioration in the environment that's what I would kind of expect. In terms of litigation expenses, as you know we are going to be getting another $300,000 this quarter and our litigation expenses right now are really low, so we’re expecting it to be somewhere less than $100,000.

Our next question comes from Cheng Cheng from Pacific Crest Securities.

A quick question on inventory; I know its low on your target level but I did see a little bit of jump in Q2, so I was wondering what’s your thoughts on the current level of inventory and what you are planning for in Q3?

Sure. Our inventory I think we mentioned in the last call that we are planning to increase our inventory because it would substantially grow what our model is. With the slowdown we have ended up a little higher than we have expected going into the quarter. And my expectation is given the wafers in line that we’ll most probably end-up this quarter at the high end of our inventory range or a little higher than that. But lots of inventory that we’ll be holding will be in die.

I see this as not necessary to get negative thing and in the past we have sudden slow down and you always will expect to see a sudden snap back. So given long-term even a slightly higher than our model inventory, if it’s slightly higher, then I can -- those products will have more effect in the long-term because our products lifecycle is about at least five years.

I wanted to follow-up and maybe just on your computing segment, I was just wondering if you would breakout about how much of that is for storage application?

Storage right now is slightly above 50% and it is LCD and SSC and the SSC portion is growing, is a faster growing opportunity.

[Operator Instructions] We have a follow-up question from Steve Smigie from Raymond James.

Just regard to the Sharkey wins; can you talk a little bit about how many OEMs did you guys might have opportunities with there?

The Romley and Sharkey, yeah we currently have a design win, not in the typical server makers, but we are in the networking company and we won the server either Romley and Sharkey design; or Romley design, okay.

And going back to the questions on storage, do you have better margins on say SSD versus HDD and as that stuff ramps within your computing mix, would that storage business be better to overall computing so we could see margins going up as storage rises in your mix?

All of the new products for servers and even for some of the ultrabooks, they are all higher in the corporate margins and much higher than the corporate margin and you mentioned that the SSD and HDD and I think these are molding up about the same where they are much higher than a corporate model, corporate average number.

And going forward, as a revenue for our SSD that would be even better margins.

Our next question comes from Patrick Wang from Evercore Partners.

Yes, I just want, I hope you could rank order for us in the back half of the year, what do you think some of your more compelling material catalysts are? I mean you guys have talked about some of the notebook server designs, talked about storage auto, industrial, could you maybe just kind of highlight a couple that we should be looking forward to in the next couple of quarters?

I think one of those definite ones will be on graphics where we continue to see incremental revenues coming in. They’re from, all from the make and some of the other products that we've been releasing. We will continue, that’s going to be a continuing story on the networking side for the modules that we had talked about. We expect those revenues to ramp in 2013. We might even see some of the earlier revenue towards the end of the year and then the other ones, going into, if you go into 2013 is going to be our revenues from [indiscernible]. Everybody, easy to remember only seven things; so I can add a few more like the lighting and Meera didn’t mention that and we expect to see a lot more revenues and easy power the product line in as Meera mentioned that in her manuscript and the internet of things and it really I think it hit the market and as I said two or three quarters ago, this product will set the industrial standards and that’s the product and that’s the product we will see a lot of activities in the market and we expect volume will ramp up very soon.

And then also wanted to touch on inventories. Your internal inventories again, so it sounds like it’s a $2 million heavy based on kind of have slower trends that we have seen recently here, but do you think that, can you just kind of help us characterize how quickly those inventories went up? Was it a more of a recent kind of phenomena, was it just kind of the timing of the change there?

We were planning to increase our inventory that we had because our goal was to keep inventory as lean as we could in the channel and so our goal was to hold more inventory internally. So some of the increase was expected with the slowdown in turns we could have a little bit more inventory but we are going to hold most of the inventory in guide banks so that allows us to respond to either to a snap back or either so we can package it wherever the demand is.

Let me add some more color on that. I said that many long time ago, as I always said, MPS’ inventory is not by a one to one relationship with the revenue and especially during a time, when you're ramping up the new product and we have to strategically build up an inventory for those product. The more new products you have, the larger inventory and so it's not quite a one-to-one relationship, pure is already a relationship with the future revenue.

Our next question comes from Tore Svanberg from Stifel Nicholas.

Yes, just two quick follow ups. First of all, as the margin is down, it's like you are a little bit more optimistic about new products may be ramping as early as Q4. Is that due to some pull-ins or some programs being launched earlier than expected?

Some of it is earlier adoptions then we would expect from new product ramp. We're seeing this in areas like the SMTP mix we talked about. We are seeing some of that in the [EZ Tab], things, the possibility, things that we might see something similar in networking as well. So we're just seeing a lot of interest in here and based on early feedback from customers, we think that we could get some design wins; we could get some early revenue in late Q4.

Yeah, our story hasn’t changed, I think been for the last couple of quarters. We all say that in middle of this year and that most of our products generating is from an existing product and in second half or later this year, it is all the new product that will move the needle slightly and so that story hasn't changed yet.

I am showing no further questions at this time.

All right. Thank you, everybody and looking forward talking to you in the next quarters.

Thanks. Bye, bye.

Ladies and gentlemen, thank you for participating in today's conference. This concludes our program. You may all disconnect and have a wonderful day.