Monolithic Power Systems, Inc. (MPWR) Q4 2012 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and thank you for standing by. And welcome to the Monolithic Power Systems Incorporated Fourth Quarter and Full Year 2012 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we’ll conduct a question-and-answer session, and instructions will be followed at that time. (Operator Instructions) As a reminder, today’s conference may be recorded. It’s now my pleasure to turn the floor over to Meera Rao, Chief Financial Officer. Please go ahead.

Thank you. Good afternoon. And welcome to the fourth quarter and fiscal year 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, 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 our Form 10-K filed on March 12, 2012, and Form 10-Q filed on November 5, 2012, which are 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 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, Q2, Q3 and Q4 2011, and 2012 releases, as well as to the reconciling tables that are posted on our website. I’d also like to remind you that today’s conference call is being webcast live over the internet and will be available for replay on our website for one year, along with the earnings release filed with the SEC earlier today. We would like to start this call by reviewing our…

(Operator Instructions) Our first question comes from the line of Patrick Wang with Evercore. Please go ahead, your line is open.

Very good guidance. Meera, my first question is this one, when we take a look at 2012, you guys grew the business -- overall business about 9% year-over-year and that’s been a pretty tough market. I’m just curious when you kind of look out over the next year or so. How do you see guys performing versus peers. So, I guess I’m curious how much out performance do you guys expect versus the overall analog group when you kind of look at it all in?

So, we expect to, definitely expect to outperform the market and the extent we outperform the market, all depends upon the market conditions that we have in 2013. But we have a very strong mix of design wins that we have. We are diversifying into several new markets that we have not diversified into before. And I think this will give us very good momentum.

Patrick, if you look at our long-term model as I said it before, 2013 we will try to hit our target model. And that’s also given the macroeconomic conditions and if the market is really against us, I think the percentage difference will show that.

Got you. Okay. That makes a lot of sense. And, you know, I apologize for drilling in the background. When I take a look at your end market, you guys have significant growth in industrial and computing, within computing, some high quality storage business. Can you talk about some of the product cycles we should look forward to, kind of, on the horizon. It sounds like you guys have got a lot of good stuff in the pipeline. If you could just kind of walk us through couple of the Q1 that would be helpful? Thanks.

Yeah. There are so many of them, not just mentioning the field. Storage continues to be strong in 2012 -- 2013 and ‘14 and also point-of-load for communications for servers and for Ultrabooks as Meera mentioned it in the script. We’ll generate a meaningful revenue in 2013.

We’d also -- we’d like to grow in industrial. We are in various different sub-segment in the industrial market like LED lighting, general industrial meters. So we expect to grow in those as well. And battery chargers is a new area that we expect to have additional incremental revenue this year that we haven’t discussed in the past.

Also, Patrick Wang talked about computing.

Yeah computing, sorry.

Got you. Now I realized it. Last question, you had a push out last quarter from Q4 to Q1, a couple of million. Meera, you talked about that on the call. I’m kind of curious how much of that came through in the fourth quarter, how much more do you expect to get in the first quarter. Thanks.

Some of the CoolPower production ramps that were pushed out of Q4 as we had said in the last call, we are seeing some of it come in this quarter. And we expect some of it to start next quarter. So, there is no change from what we had discussed in the last earnings call.

Thank you. Our next question comes from the line of Tore Svanberg with Stifel Nicolaus. Please go ahead. Your line is open.

Yeah. Hi. This is Evan Wang calling in for Tore Svanberg. Thank you for taking my questions. You have mentioned in your prepared remarks that you are seeing good business momentum. I was wondering if you could add some color to that comment. Where are you seeing the indications and what are some of your customers saying and maybe what are your bookings trend in your distri channel is looking like?

We said, I think, in the last quarter. There are a few customers -- there are a couple of customers that push out orders to Q1. And we also say that, okay, we see a positive momentum for MPS in the business. So all our customers stayed push out to Q1 and the orders came in. And other business segments, we are new to the market and we see a huge amount of growth opportunity. And we see all the tailwinds, we feel the tailwinds now.

Okay. Just to add to that, we have been hearing from our customers increased confidence in the fourth quarter and in the last few weeks we have seen a pickup in orders. We have seen higher resale, all of which support the feeling that the momentum is building.

Thank you. And for my follow-up question, you had mentioned earlier in your response to one of the questions that you would try to hit your target model in 2013. Would you also including your revenue growth in that hitting the target model. I understand that you have a long-term revenue target of $500 million. So given that 2012 from a macroeconomics perspective hasn’t been all that helpful. Do you see some catching up in 2013?

Of course, MPS is a business borne by the macroeconomic conditions. What I’m talking about, you can’t really absolutely talk about the numbers. What you said -- and yeah, of course, the revenue is included in the target model. And I think what I really mean is the percentage is different from the industrial growth to MPS growth.

Great. Thank you.

Yeah. We are not speaking to our growth rate number. I just want to make that clear. We just expect to be able to continue to outperform industry. If the market stays the same we will still outperform. If the market improves, we expect that could be sharper.

Thank you. Our next question comes from the line of Steve Smigie with Raymond James. Please go ahead. Your line is open.

Great. Thanks a lot and good to hear that things are looking up a little bit nice guide for the March quarter. I was hoping you could talk a little bit more about EasyPower. It seems like you had a fairly compelling solution there and can you talk a little bit about some color you might have had and because you’ve gone up against competition. And they looked at the size and the ability of your solution and told you why you -- like how would that bake off and go. And then specifically, can you still update us on what the market opportunity could be in 2013 and then what kind of growth did you see in 2014?

I think that EasyPower really at the beginning of the ramp. And we see a lot of application, building automation and also some of the infrastructures for environmental monitoring and those are widely accepted by our customers. And where we will see the revenues continue to grow and/or will start to grow in 2013 and continue to grow in 2014 as we call internal things became more and more popular.

Okay. Great. And then on your server power solutions, for Grantley have you seen anything that would suggest maybe how do all ramp starts more quickly for you or Grantley ramps starts more quickly for you than you might have thought. And it seems like there is some urgency or desire to push that forward to accept pull revenue forward for you a little bit or have you kind of already accounted for that in what you’ve told us?

I think that we have a lot of our design winning in the Haswell and in the Grantley Solutions. And we will see the revenue. We will see the strong revenue in 2013.

On the Haswell Ultrabook front, we expect that to be bigger in the second half of the year because that’s when Haswell really ramped. But we’re already seeing some pre-production ramps now.

Thank you. Our next question comes from the line of Ross Seymore with Deutsche Bank. Please go ahead, your line is open.

Hi. Thanks for letting me ask a question and congrats on the solid guide. Especially just looking at the first quarter guide, first and foremost, is there any large delta from an end market perspective and what you expect these segments to grow versus the 6% average at the midpoint of your guidance?

In terms of with -- we will be able to kind of get very granular on this towards the end of the quarter. So, what I can see from the early signs right now I would say that I’d expect growth in all three of the market segments that they’re targeting -- communications, commuting and industrial.

Got it. And then a bit of housekeeping more than anything else, what should we think of as far as how OpEx growth versus revenue tax rate for the year and CapEx for the year?

Sure. Let’s start with CapEx. We expect CapEx to be around the $20 million level. In terms of the tax rate, I would say, we still expect to be below $10 million. So, I’d say -- we usually say $5 million to $10 million. And the reason we kind of give that range is there are bunch of discrete items that we won’t know until as the year plays out, but right now we expect to be 5% to 10%. In terms of OpEx, a lot of it depends upon the market. If market conditions continue -- if our revenue continues to be at the level we are projecting now, we will keep our expenses down as much as we can. So, I would expect that we would have some increase in new product costs, while some additional cost for key hires in marketing and sales. So once, say, business were to go back to normal and we see normal cyclicality out there than we would see -- we’ve been holding down a lot of discretionary spending and we would see that increase. We would also start investing in the future and start hiring more sales and marketing people in particular.

Great. Thank you.

Thank you, sir. Our next questioner in queue comes from the line of Cheng Cheng with Pacific Crest. Please go ahead, your line is open.

Thank you. So, maybe a first question on the charger product, you talked about kind of seeing revenues in the second half. I was wondering if you can give a little more color around maybe the quantity or the quality of customer wins you have there or how big the opportunity you think it is.

We see -- the consumer or the MPS was a consumer centered company. We -- in the last couple of years we would try to diversify from the consumer market segments. And although the revenues where we start to -- we see the growth in 2013 a bit more opportunistic and that’s not the segment where we’re really focused on.

Okay. And maybe if I’m just looking, you guys have a variety of different ramps and designs, just looking at the segments outside of consumer. I guess, which end market do feel most excited about in 2013, is that computing or…?

Meera talked about it earlier. The industrial growth was almost 100% in 2012, and we see the similar momentums. I don’t imply the similar percentage and over growing tremendously in the market segment. And also the computing, telecom, and these are all in the storage, these are all our opportunities.

The three target markets that we have, we expect to be able to grow in all of them. Industrial, as you know, is typically slower just by the nature of that market, but we have design wins in various -- from various different customers that will ramp. Computing, clearly, we’ve got the Ultrabooks. We’ve got the storage that’s going to be driving it. Communications is also an area where we expect revenues -- incremental revenues from Telco. But that’s again a slightly slower market to ramp, but as we go out this year you will definitely see design ramps. I mean revenue ramps from all three segments.

Thank you. Our next question comes from the line of Gus Richard with Piper Jaffray. Please go ahead. Your line is now open.

Yeah. Thanks for taking my question. On a little bit different tack here. Just curious what you are seeing in terms of wafer availability in terms of wafer pricing these days? Has it gotten better or worse or are the foundries tightening up at all sort of? How is that supply side of the equation working these days?

In terms of availability, we don’t see any tightening out there. And if you remember as compared to 2010, we have a couple of different facts in our favor. One is that we have a smaller die size, which means we can get more wafers out of the two foundries that we have then. We also have a third foundry. So between that, we have higher wafer capacity and also remember that we are going into this upturn where the higher level of inventory that we had in prior upturns. And I think the combination of that we are not as concerned about the supply side of the equation right now.

And then just -- I may have missed it, but did you give the mix of BCD2 versus BCD3 at this point?

I think we exited Q4 with about 40% of revenue was from BCD3, and we expect that to grow as we exit 2013 to maybe 60%, 70% level.

Thank you. (Operator Instructions) Our next question comes from the line of Lena Zhang with Baylock RV. Please go ahead. Your line is now open.

Yeah. Thank you for taking my questions. I’m just kind of confused about your gross margin. In Q4, your revenue is down around the 15%ish and of course margin held pretty well, but look at your midpoint of Q1 revenue guidance and up sequentially but it’s much better than the seasonality. But gross margin guidance just seems a little bit weak, so would you please help me understand that?

Okay. Lena, this is not a precise point of index. Any small percentage of a change, we have a lot of factors in there. We can have a product mix and new product wins and so any small percent of a change like it’s a real business, not a real financial model.

And then, I just want to add to Michael’s comment. We have this -- we are diversifying market and we are introducing new products that have better gross margin profiles. So what we are targeting is to see continued gross margin expansion and if you look at our guide for Q1, that’s what we are seeing. We have some revenue growth, but we also have an attendant gross margin expansion that we’re forecasting right now.

Okay. Thanks. That’s all I have.

Thank you. Our next question comes from Patrick Wang with Evercore Partners. Please go ahead. Your line is open.

Yeah. Thanks. I just want to follow-up one thing. Can you remind us what your long-term targets are? I think on revenues in terms of OpEx, I think as we kind of look ahead with all these product cycles and growth drivers, I just want to refresh on that? Thanks.

Okay. The long-term business model that we’ve been talking about is the one that we announced back in July of 2010, when we were focusing on more high-volume market strategy, and while some of those elements might not be quite as applicable. The key point that we have is our operating margin. We want to be a company that has a high operating margin, and we are targeting about 25% to 30% earnings. But that’s our long-term model and we recognized that we have two levers that we can pull the revenue and gross margin. We want to continue to be a high growth stock, I mean high revenue growth company as well as having a very attractive gross margin.

Okay. Great. Thanks.

Thank you. Our next question comes from the line of Steve Smigie with Raymond James. Please go ahead. Your line is open.

Great. Thanks a lot. And I just wanted to follow-up on the earlier question on BCD3. So with regard to the penetration you are talking about, is that just on the parts where you want BCD3? I know you’re rolling out BCD4 similar for separate products, so just hoping you could talk a little bit about? Is that penetration that you’re talking about, it’s just on the parts you want and just give an update on where you’re on the BCD4? Thanks.

The BCD3 product at this time is really the industrial leader for power density, and all the parts that we released from our second half of -- from the beginning of the first half of last year’s, all the parts released were all based on BCD3. And now these are products that are hitting the market for across the board from telecom and computing and also the EasyPower product line. And so in the 2013, we’ll continue to grow. And as Meera said the percentage of production shift from the BCD2 to BCD3 where you see that exhibit to this year is probably more than 60%, 70%. And we released the BCD4 product, which is further up to about 50% of a shrink from a BCD3. And those products, initially we’re targeting for telecoms and some of the industrial servers use.

Yeah. So, we would be rolling out those products on BCD4 this year, and I’m expecting revenue from them more in 2014.

Okay. Great. And then just on the margin, can you talk a little bit about what the gross margin might be in some of the newer products versus, say, some of the consumer stuff that you are focusing less on in and let’s just say in an environment where if the products been in production for little while and so you don’t have any ramping issues. What sort of differential would you expect in that mix?

For the gross margin side, all the market segments we targeted tend to have a higher margin. And so as we grow in the margin real growth, but at the same time we still have a large percentage of product revenue in the consumer segment. We still have to defend that. And so the, let’s say overall, going forward we do see a margin creep up but at this time we don’t give it -- it’s not the right time to give a long-term gross margin model now.

Okay. If I could just speak one more on storage, it’s obviously been pretty successful for you guys. What’s the product cycle for that product, does that run just through ‘13 and then you have to introduce something new in ‘14, or how does that play out?

The pre-mix that we introduced for SSD, is just one of a series of family of products that we have. So we expect to be able to continue to play and expand our revenues in this market as we come out with new products. So we expect that cycle to extend beyond 2013.

And to answer your question more clearly, yeah, it is model dependent and we do have to an executing. The design cycle is about a year or so.

Okay. Great. Thanks a lot. I appreciate it.

Thank you, sir. And presenters, I’m showing no additional questions in the phone queue. I would like to turn the program back over to Meera Rao for any additional or closing remarks.

We would like to thank you all for joining us on this call and look forward to talking to you again in April. Thanks and have a nice day.

Thank you, presenters. Again, ladies and gentlemen, this does conclude today’s conference. Thank you for your participation and have a wonderful day. Attendees you may log off at this time.