Monolithic Power Systems, Inc. (MPWR) Q1 2018 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Monolithic Power Systems Inc. Q1 2018 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-answer-session and instructions will follow at that time. [Operator Instructions] As a reminder, this conference is being recorded. I would like to introduce your host for today's conference Bernie Blegen, Chief Financial Officer. You may begin.

Great, thank you. Good afternoon and welcome to the first quarter 2018 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 risks 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 Q1 earnings release and in our SEC filings, including our Form 10-K filed on March 1, 2018 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, R&D and SG&A expense, operating income, interest and other 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 of 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, 2017; Q4, 2017 and Q1, 2018 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. MPS had yet another record first quarter with revenue of $129.2 million, 28.7% higher than the comparable quarter in 2017. MPS continues to benefit from our technology leadership and diversified multi market strategy. Looking at our revenue by market, compared with the first quarter of 2017, revenue from consumer markets increased $11.5 million, or 32.4%. The year-over-year revenue increase reflected solid improvements and high value consumer markets including home appliances, power chargers and lighting, as well as increases in certain traditional consumer revenue categories. Consumer revenue of $47.1 million represented 36.5% of our Q1 revenue. In our computing and storage market, revenue of $31.0 million increased $10.4 million, or 50.2% year-over-year reflecting strong sales growth for cloud computing, SSD storage and high end notebooks. Computing and storage revenue represented 24.0% of MPS' first quarter 2018 revenue. First quarter 2018 automotive revenue of $17.7 million grew 43.8% over the same period of 2017. This growth primarily represented increased sales of infotainment, safety and connectivity application products. Automotive revenue represented 13.7% of MPS' first quarter 2018 revenue. First quarter 2018 industrial revenue of $17.6 million increased 14.3% from the first quarter of 2017, reflecting gains of smart meters, security and power sources. Industrial revenue accounted for 13.6% of our total first quarter revenue. In Q1, MPS adopted the revenue recognition standard generally referred to as TOPIC606. Its adoption had a negligible impact on Q1 revenue. GAAP gross margin was 55.4%, 40 basis points higher than the fourth quarter of 2017 and 80 basis points higher than the first quarter of 2017. Our GAAP operating income was $22.0 million, compared to $13.6 million reported in the first quarter of 2017. For the first quarter of 2018, non-GAAP gross margin was 55.9%, 20 basis points higher than the fourth quarter of 2017 and 40 basis points higher than the first quarter of 2017. Our non-GAAP operating income was $37.2 million, compared to $26.5 million reported in the first quarter of 2017. Let's review our operating expenses. Our GAAP operating expenses were $49.5 million in the first quarter of 2018, compared with $41.3 million in the first quarter of 2017. Our non-GAAP first quarter 2018 operating expenses were $35.0 million, up from the $29.2 million reported in the first quarter of 2017. The differences between non-GAAP operating expenses and GAAP operating expenses to the quarters discussed here are, stock compensation expense and income or loss on an unfunded deferred compensation plan. For the first quarter of 2018, total stock compensation expense including approximately $433,000 charged cost of goods sold was $15.0 million, compared with $11.7 million recorded in the first quarter of 2017. Switching to the bottom line, first quarter 2018 GAAP net income was $21.9 million, or $0.49 per fully diluted share, compared with $0.33 per share in the first quarter of 2017. First quarter 2018 non-GAAP net income was $35.0 million, or $0.79 per fully diluted share, compared with $0.58 per share in the first quarter of 2017. Fully diluted shares outstanding at the end of Q1, 2018 were $44.3 million. Now let's look at the balance sheet. Cash, cash equivalents and investments were $312.5 million at the end of the first quarter of 2018, compared to $304.3 million at the end of the fourth quarter of 2017. In the quarter MPS generated operating cash flow of about $16.3 million, compared with operating cash flow of $21.9 million in the first quarter of 2017. First quarter 2018 capital spending totaled $7.4 million. Accounts receivable ended the first quarter of 2018 at $48.2 million, or 34 days of sales outstanding, which was one day lower than the 35 days posted in the first quarter of 2017. Our internal inventories at the end of the first quarter of 2018 were $111.9 million, up from the $99.3 million at the end of the fourth quarter of 2017. Inventories increased in anticipation of sales growth during the second half of 2018 especially for the computing, consumer and automotive markets. Days of inventory increased to 177 days at the end of Q1, 2018, compared with 157 days at the end of the first quarter of 2017. I would now like to turn to our outlook for the second quarter of 2018. We are forecasting Q2 revenue in the range of $135 million to $141 million. We also expect the following: GAAP gross margin in the range of 54.9% to 55.9%. Non-GAAP gross margin in the range of 55.4% to 56.4%. Total stock based compensation expense of $15.2 million to $17.2 million, including approximately $500,000 that would be charged to cost of goods sold. Litigation expenses ranging between $300,000 to $500,000. GAAP R&D and SG&A expenses between $48.4 million and $53.4 million. Non-GAAP R&D and SG&A expenses to be in the range of $33.7 million to $36.7 million. This estimate excludes stock compensation and litigation expenses. Interest and other income is expected to range from $600,000 to $700,000 before foreign exchange gains or losses. Fully diluted shares to be in the range of 43.9 million to 44.9 million shares. In conclusion, we continue to grow and continue to enhance shareholder value. I will now open the phone lines for questions.

[Operator Instructions] And our first question is from Quinn Bolton from Needham. Your line is now open.

Hi, guys, nice results. Michael and Bernie wanted to start with the power management business specifically for the Purley cycle. Can you give us an update on when the QSMod solutions for CPU power begin to ramp? Does that start this quarter?

I think if we see it starting last couple of quarters and just slowly. There are all these activity, yes, now that we see a lot more.

Yes and I think that in addition to Purley, we certainly increased the number of design wins that we have on this cycle with some of our other products, the point of load in the E-Fuse. And so as we look ahead, we see a continuing momentum.

Did you guys still think you're on track to pick up those 45 points of share that you'd previously talked about?

Yes, well, we only talk about results for the next quarter of forecasts; we don't see anything that's changing that assumption.

Okay.

This is a very beginning - at the very beginning early for MPS. All the opportunities still developing here.

Okay and then the second question just kind of it looks like your inventories are up in anticipation of sort of higher second-half sales, but I think the last couple of quarters you've said that the things in the supply chain are tight. You were worried about double ordering and I think that was particularly something that you're worried about heading into the fourth quarter. Can you just give us an update on your backlog coverage? Do you think you've seen - have you been able to sort of shake out any potential excess from the order books?

Yes. I think that it's prudent to be cautious as far as interpreting the ordering trends that we're seeing. In each of the last three quarters, the bookings and backlog going into the quarter have been running higher than they traditionally have. And so as a result of that we wanted to a, be able to make sure that we have adequate inventory in order to be able to meet real demand, but by the same token we're trying to manage what we observe as far as inventory in the channel to make sure that that doesn't increase and come at the expense of future growth. So when we looked at the channel inventory at the end of Q1, it was very consistent, in fact, it was down a few days more we've been a year ago.

Thank you. Our next question is from Rick Schafer from Oppenheimer. Your line is now open.

Thanks and congrats on another nice quarter, guys. So your auto business maybe my first question, your auto business has been doubling annually I guess the last few years. I think it was up close to [50%] [ph]. I think you highlighted Bernie in your remarks this past quarter. Can you talk about the growth expectation for 2018 as much as you much color as you can give there? And maybe provide some color on what's driving that growth? I mean it seems like ADAS becoming a bigger incremental driver. So as mix kind of maybe favors ADAS going forward. Can you talk about what that does to maybe gross margin in that segment?

Sure. When we look at automotive right now we are certainly benefiting from significant growth, but still we represent such a small portion of what the total available market is to us. So a lot of what we're seeing right now is been any gains in infotainment and then we've also seen some gains in body controls and also in certain of the networking applications. And we look forward to opportunities in ADAS In particular, although I don't think that those will be of a material nature to us until for another couple of years.

Got it, thanks. Second question, 12 volt to 48 volt transition that's sort of already underway in auto. Can you talk about that opportunity as it relates to GPU and CPU core power? Is that something else that we should think about as being sort of a couple years from now but before it's really a growth driver? And who do you expect to compete with there? Who do you see also going after the 48 volt market for CPU, GPU?

I think a 48 volts market is an inevitable and as CPU or GPU power increases that's the only way to get the current down, to get the efficiency up and thing is that it's all, well none of the our competitors they are publishing papers, but we have solutions now.

And Michael any key competitors you see there. I mean it would be the sort of the TIs and the Infineons of the world or who would it be do you think at 48 volt?

I don't think, we don't have a see a real solution out there, okay other than existing 48 volts, and 48 volts which is a very expensive as far as I know. And I think we are first few companies, first company that has our own solution as semiconductor players.

Got it and then if I could sneak one last question and just maybe a quick update on your 300 millimeter design efforts and I don't know how to frame that I mean any expectation or what your expectations are for 300 millimeter revenue contribution this year? Or is it more of a - I know I'm asking a lot of far out questions I mean is it more of 2019, 2020 kind of thing.

And I think it's 2019, 2020 kind of things. And I mean I don't rule out, and at the end of the year we have some small volume productions happening.

Michael is it targeting any particular like specific verticals or is it just kind of across your basket of verticals?

I think it's across a basket of vertical. Now we with 12 inch and we integrate a lot more features in there and as we talk about a lot of programming capability, a lot of memories and along with the increase of a power density and I think we'll be putting a power solution as MPS name, the Monolithic Power System, we're going to put a sub power systems on a single chip in 12 inch - 12 inches just widen our capability.

Thank you. Our next question is from William Stein from SunTrust. Your line is now open.

Great, thanks. I'd like to sort of contrast the growth rate it in light of your inventory building the quarter. I mean you've been a rapid growth company for some time. You've accelerated the year-over-year growth in the last couple quarters now, which is great and inventories are increasing. Should we expect that acceleration to continue and to see even higher year-over-year growth rates as we've progress through the year? That's what the inventory build would imply. So it's not a hoping maybe we can reconcile it a little bit. Thank you.

Yes, that's a good reading. Okay, I mean of course we're not sayings and okay we're going to accelerating more but the way I certainly anticipated that. Okay, if there's opportunity there.

And for investors that sort of looks at this outsize growth rate and recognizes it's pretty unusual, pretty unique in semis. Can you help us maybe review the reasons that you're seeing the design wins maybe from a technology perspective or just from the design wins that you've won recently that you can talk about that would exemplify why you're seeing such rapid growth?

Well, it's a - if we're talking about all the design wins and okay we can go for hours. And I frankly I don't even know. I can remember three or four things. Look I mean just-- this is truly a broad-based growth and we're not using our standard product and using our configurable software, we can go into a many different field, that's actually reality, yes, and that's the beauty of it. I can't say which one has a more growth and now you're talking about server, locking and talking about autos, and these are much a very high concentrated market segment that we can talk about it. But a lot of others actually grow more than these areas. So I can't really talk about it in a - in fact, lot of smaller customers using our solution that really excites me. That means okay we're pushing a margin even higher, and we provides the service. Our customers really want that even though we have outrageous margins. So that's kind of things I'm getting excited.

Thank you. Our next question is from Ross Seymore from Deutsche Bank. Your line is now open.

Hi, guys. Congrats on the quarter and guide and the comments you said earlier Bernie about the inventory up because you saw opportunities in the second half. I think you said in computing, consumer and automotive. Without going into specific customers and sockets et cetera can you just talk a little bit about the applications into which you're putting those parts to the back half of the year? And just what sort of dollar content penetration, market penetration just some numbers around those to give us a little more color to help investors feel comfortable at the inventory level?

Sure. So when we look at a lot of the growth that we've started to enjoy probably beginning in Q3 of 2017. We were basically introducing new products and new markets for new customers. And the demands of these customers are significant meaning that we didn't want to come out of the gate with our new release, new product releases and not be able to sustain the growth because of being constrained in any way. So I think you recall that last year we invested in bringing up a fourth fab in order to aid capacity. So really this has been pretty consistent, as far as an overarching supply chain management philosophy to position us to be able to achieve as Michael said, should a demand be there, this accelerated rate of revenue growth. And we believe that we have actually targeted so when we look at the inventory levels, they're targeted in some of the highest growth revenue areas. And right now it's also in the quarter pretty well evenly split between raw materials work and process and finished goods meaning that what we've done is have a very balanced approach to how we're making those investments.

Yes. Ross you don't have to worry about these inventories, look I mean we increase it and I know this our invest - our investors - some of the investors kind of sensitive okay and I'm a kind of irritated okay. We grow this much and we need it real, a real inventory to back it up and on top of it all these products, a new product, because anything goes wrong we have something to back it up. And also provides with some industrial automotive even computing company, they want inventory, they want okay we are the new players and we guarantee they're supplied. So that's why we're doing it. And so last reason is I don't worry about inventory, our product cycles the last for 10 years and we never - we don't have a problems until have a huge write-off.

That is very helpful. My second question and I'm going to try not to irritate you further if that one happened to this might do worse but the guidance on an absolute dollar basis the guidance is great, on year-over-year the guidance is great, sequentially though that's less growth than you guys I mean I have to go back many, many, many years. Is there anything that's changing in the very near term, the bridge between now and the second half growth that's less than normal? Is there something that's changed just with the move to ASC 606 as far as the seasonality? Just trying to figure out or you're just being conservative like you tend to do over time for consistency benefits. Just try to figure out what went into the guidance in those regards.

Sure I can help out with this. So if you look at generally speaking we have a fairly large or pronounced fall-off in revenue between Q4 to Q1. And that didn't occur, so the base that we're starting out with Q1 revenue is much higher than the seasonal norm would normally have provided for. And some of that represented that we had some late deliveries in Q1 that aided our performance in the quarter, but then also creates an issue with the comparable Q2 number. So I would say that we do have a profile to always be able to meet expectations. And in fact do a little bit better and there is a change in seasonality relative to what our historic norm has been with Q1. And none of that is related in any way to the 606 the new revenue recognition standard.

Yes, well, I think Ross you cover us as things the IPO right. And you see that seasonality change and from a consumer centric to broad-based announcing okay. And last year, we see a four quarters consecutive growth. That's the first time I think a first time ever in 2006. That was the last time so this is the second time. And I think at this time is a really changed from - or the business change. And that's a less irritated question.

Oh, I am glad I didn't annoy too terribly, so congrats again guys.

Thank you. Our next question is from Tore Svanberg from Stifel. Your line is now open.

Yes, thank you and congratulations on the consistency. First question could you update us on ecommerce and your programmable products or is that business model starting to contribute to revenue yet or is that still more of a second half event?

Well, I think our web e-commerce website is up and I think that's the only the first step and regarding to revenue, no, okay and but the business model it's more - the more I visit customers, these are smaller customers and the more I really excited. I think of this is a we were hitting flashing point, sometimes this year or next year, as we provide a more color - now it's the time provide more content, working with full on the website. How we serve to all these, time to - very quick time-to-market product or underserved customers. And the business models are truly really believe more and more I believe when I visit those smaller customers. And I see a lot more opportunity and now we have a delivered more content. We have the website but although the programming portion is still not there yet, but as we - as I talk about we hand them a floppy disk, they can program it on their own now.

That's really helpful and on that same topic and as that business models start to materialize. I mean wouldn't that mean that inventory days will be higher anyway just because these are programmable parts.

I haven't really thought about this or probably because we have a third-party product and as our part of our solutions okay. And so that probably will be a higher inventory in the futures.

And sorry part of the benefit of being able to go to the 12 inch wafer is that we can have larger production runs and get better cost economics that certainly benefit this mass customization market.

Okay, great and I had a follow-up question on the on the 48 volt. So are you going to be BCBHV process for that or is it something else?

No, that's correct. And we have a very efficient solutions and I think as a lot of people seen it and we're presenting a papers. We have a real we have a real product now okay. And these are - this product family is a very cost effective, and I think as a 48 volt we're really betting on it, that's our future.

Okay, very good, just one last question. I know there have been some talks in the industry about shortages especially for raw wafers. Is that something that you're seeing and have you secured enough capacity there for your growth going forward?

We don't have a shortage and we don't have a shortage. In last year we expand a fab and that this year we expand fab again. And we don't see shortages okay. We have a lot of inventory. So, no. we don't have a shortage issues. And two other ones I heard a lot of stories okay out there. I can't confirm.

Thank you. Our next question is from Chris Caso from Raymond James. Your line is now open.

Yes, thank you, good evening. Just a another question following on to the seasonality question and is there anything in particularly we should be thinking about seasonality with respect to individual segments embedded in the Q guidance was automotive and computing carrying much of the sequential growth in Q1? Does that continue into Q2 or do you see a bit more broad-based revenue growth as you go in Q2?

I can give you something as well. See it again in what I believe the business that we focus on a very long term and in a very broad-based and these are designing activities. And I have designing activities turn into a revenue takes about three or four years. And we see all these activities and we see all these activity turning to our revenues. And I think from now on we will have a very consistent growth. And that's really what we want to see it in a steady state, in a growth - maybe steady to have a bad connotation, somebody going to pick up okay we're slowing down, we're not okay. So I think as a consistent is the key. And from next couple of quarters and we don't see it much of a difference from last year I guess yes.

I mean one of the things that we work to do is even though we're on a high growth relative to our industry is we want to be predictable. And I don't think there's anything boring about that.

Well as follow-on to that given that what appears to be strong industry conditions, strong revenues for you guys. To what extent are you able to be somewhat selective in the business that that you take from a quarter-to-quarter basis? That I'm sure that there's some margin discrepancies up among some of the things that you sell given the business conditions right now are you able to be a little bit more selective in that business? And if so, what's does that mean?

One of the things that we benefited from is we've seen this shift in our business mix is that there's longer lead times and so as a result of that we're able to have very consistent 10 to 20 basis points improvement in our gross margin quarter-over-quarter and what that allows us to do is find the mix that allows us to accelerate our rate of revenue growth. So it's really having that visibility in that lead time that allows us to be able to manage the business in this manner.

Great. If I just one quick follow on in computing, Intel made some changes to the roadmap on 10 nanometer pushing, some of that out I know that you guys have had some design wins on that. Is any material effect on your business going forward?

No. We are - we keep an eye on what Intel is doing but as far as a delay and a release or a change in their roadmap, it does not - is not going to impact us.

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

Thanks very much. Michael can you run through some of the R&D projects currently underway that you're most excited about?

Oh, it's of emotions and I just visit a couple of customers when I came in these are really need our help and they will glad to see us okay. These are from what do you call it the mill the packaging sorter to warehouse management, to massage chairs, to a hospital bed okay and they have a different kind of a design and each design take them half year or three months to half year. And we can't go in there with our standard product, standard module, and sometimes they want to buy us - our bio modules and we buy from a third party. We produce several standard product and we use a program to change it either significantly change our business. We sell in instead of a few dollars a chip now we sell $20-$30 module now. And our customers or those customers really want this product. And so they do not have to go through a design. So that's kind of thing to get me excited.

I think just to add to that sort of two things that all of our R&D is focused on right now is really the ease of use, and that we're really focused on selling our customers solutions as opposed to just an individual IC.

Okay, great and our one thing just confirmed Bernie I think last earnings call you talked-- you said that adoption of ASC 606 has negligible revenue recognition impact on Q1 revenues and that's still true going into the next quarter. Is that correct?

That is correct.

We just sell two modules right. We never have sell-through models.

Yes. We only --our business we had very a small portion of it that was on sell-through.

Since the beginning of the company inception, company will always build sell-through models.

Correct.

You buy a product, you owned it. We don't have -

Thank you. At this time, I'm showing no further questions. I would like to turn the call back over to Bernie Blegen, Chief Financial Officer for closing remarks.

I'd like to thank you all for joining us to this conference call. As a reminder, MPS will be hosting an Analyst Day on June 7th at our offices in San Jose, California. We expect this to be an informative update on MPS' strategic direction. I hope you will be able to join us. And if you are unable to join us on June 7th, I look forward to talking you again during our second quarter conference call which is likely to be at the end of July. Thank you. Have a nice day.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may now disconnect.