Monolithic Power Systems, Inc. (MPWR) Q2 2018 Earnings Report, Transcript and Summary

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

Thank you very much. Good afternoon and welcome to the second 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 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 Q2 earnings release and in our SEC filings, including our Form 10-K filed on March 1, 2018 and Form 10-Q filed on May 8, 2018 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 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 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 Q2 2017, Q1 2018, and Q2 2018 releases as well to the reconciling tables that are posted on our website. I would 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. In the second quarter of 2018, MPS set a new high watermark in quarterly revenue and non-GAAP earnings per share. MPS’s Q2 revenue of $139.8 million was 8.2% higher than revenue in the first quarter 2018 and 24.6% higher than the comparable quarter in 2017. MPS’s sales momentum continues to build as we generate superior results from our R&D investments targeting the computing, automotive and industrial markets. Looking at our revenue by market. In our computing and storage market, revenue of $37.0 million increased $12.5 million or 51.1% year-over-year. Growth in this market was broadly when compared to the year ago quarter, with all applications, cloud computing, storage and high-end notebooks increasing at a rate well above the market. Computing and storage revenue represented 26.4% of MPS's second quarter 2018 revenue. Second quarter automotive revenue of $20.3 million grew 58.2% over the same period of 2017, fueled by product sales for infotainment, safety and connectivity application products. Automotive revenue was 14.6% of MPS's total second quarter 2018 revenue. In our consumer markets revenue of $47.8 million increase 8.9% over the second quarter of 2017 and represented 34.2% of our second quarter 2018 revenue. The year-over-year revenue increase reflected gains in home appliances, IoT-related applications and specialty lighting. Second quarter 2018 industrial revenue of $19.1 million increase 27.2% from the second quarter 2017 due primarily to increased sales of industrial power supplies. Industrial represented 13.7% of our total second quarter 2018 revenue. GAAP gross margin was 55.5%, 10 basis points higher than the first quarter of 2018 and 80 basis points higher than the second quarter of 2017. Our GAAP operating income was $24.9 million compared to $22.0 million reported in the first quarter of 2018 and $15.0 million reported in the second quarter of 2017. Non-GAAP gross margin for the second quarter of 2018 was 56.0%, 10 basis points higher than the first quarter of 2018 and 40 basis points higher than the second quarter from a year ago. Our non-GAAP operating income was $41.4 million compared to $37.2 million reported in the prior quarter and $31.2 million reported in the second quarter of 2017. Let’s review our operating expenses. Our GAAP operating expenses were $52.7 million in the second quarter of 2018, compared with $49.5 million in the second quarter of 2018 and $46.5 million in the second quarter of 2017. Our non-GAAP second quarter 2018 operating expenses were $36.9 million, up from $35.0 million we spent in the first quarter of 2018 and up from the $31.2 million reported in the second quarter of 2017. The differences between non-GAAP operating expenses and GAAP operating expenses for the quarters discussed here are stock compensation expense and income or loss on an unfunded deferred compensation plan. For the second quarter of 2018, total stock compensation expense, including approximately $480,000 charge to cost of goods sold was $15.9 million, compared with $15.0 million recorded in the first quarter of 2018. Switching to the bottom line. Second quarter 2018 GAAP net income was $24.2 million or $0.55 per fully diluted share, compared with $21.9 million or $0.49 per share in the first quarter of 2018 and $15.0 million or $0.35 per share in the second quarter of 2017. Q2 non-GAAP net income was $40.0 million or $0.90 per fully diluted share, compared with $35.0 million or $0.79 per share in the first quarter of 2018 and $29.5 million or $0.68 per share in the second quarter of 2017. Fully diluted shares outstanding at the end of Q2 2018 were $44 .4 million. Now, let's look at the balance sheet. Cash, cash equivalents and investments were $318.7 million at the end of the second quarter of 2018, compared to $312.5 million at the end of the first quarter of 2018. For the quarter, MPS generated operating cash flow of about $25.4 million compared with Q1 2018 operating cash flow of $16.3 million. Second quarter 2018 capital spending totaled $5.6 million. Accounts receivable ended the second quarter of 2018 at $53.5 million, representing 35 days of sales outstanding which was 1 day higher than the 34 days reported above that at the end of the first quarter of 2018, and at the end of the second quarter of 2017. Our internal inventories at the end of the second quarter of 2018 were $128.9 million, up from the $111.9 million in the first quarter of 2018. Days of inventory increased to 189 days at the end of Q2 2018 from the 177 days at the end of the first quarter of 2018. The increase in inventory days is due to build up in advance of seasonally high Q3 revenue, changing customer requirements, particularly in automotive, computing and gaming applications, and hedging for potential upside in the second half of 2018. I would now like to turn to our outlook for the third quarter of 2018. We are forecasting Q3 revenue in the range of $155.5 million to $161.5 million. We are also expecting -- we also expect the following: GAAP gross margin in the range of 55.2% to 56.2%; non-GAAP gross margin in the range of 55.6% to 56.6%; total stock-based compensation expense at $15 million to $17 million including approximately $500,000 that will be charged to cost of goods sold; GAAP R&D and SG&A expenses between $52.3 million and $57.3 million; non-GAAP R&D and SG&A expenses to be in the range of $37.8 million to $40.8 million. In anticipation of higher revenue in the next two to three years, we are stepping up investment in our foundry capabilities. We're actively qualifying two 12-inch fabs and are in the process of developing advanced technologies. Other income is expected to be in the range from $600,000 to $1 million before foreign exchange gains and losses. Fully diluted shares to be in the range of 44.0 million to 45.0 million shares before share buyback. We are continuing to execute our long-term business strategy which we believe will maximize long-term shareholder value. I'll now open the phone lines for questions.

[Operator Instructions] Our first question comes from the line of Ross Seymore with Deutsche Bank. Your line is now open.

[Technical Difficulty]Thanks for letting me ask the question. [Technical Difficulty] I just want to focus in on the auto business a little bit. It’s kind of grown from being your smallest business line to now larger than both comm and industrial. At the analyst day, you guys detailed that you see auto growing in a 40 to 50% CAGR. Auto grew about a 60, 65% CAGR from 2013 to 2017. Is it fair to think of auto growing like at about maybe 40% CAGR going forward through 2021? I guess, how do you guys think about the growth going forward?

Sure. At the Analyst Day that was on June 7th, we characterized growth for the next three years of being in the range between 40% to 50% in any given year. And on a quarterly basis, because there's sort of a step function with how revenue increases here that it could be between 30 and 60%. So, I think that you're in the right ballpark for your CAGR.

All right. I appreciate that. And next, I'd like to ask about the inventory dynamics you guys had this quarter. I understand you guys had prepared remarks, but I'd love to hear you guys elaborate a little bit more on this. Inventory is up 39% year-on-year, that's ahead of revenues for actually the sixth straight quarter. Maybe there's some mix dynamic there, I understand with the auto maybe some of your parts have a longer life cycle and maybe require more of a build. But, is there anything else that you'd like to elaborate on why inventories continue to be outgrowing revenues.

Actually, you gave a pretty complete answer for me there. In that, we’re…

What we really said in earnings, one of those is that we're hedging the potential future growth. And I can give you more color is that we have so many products introduced in the market, they start to ramp. A lot of them we still haven’t seen the revenue yet. And during the ramp, you don’t want you to see any hiccup, either the number of the products or the quantity issues, and we don't have any history of it. And so, we would be very cautious. We use the cash wisely. And in terms of MPS in history, we don’t ride a lot of inventory. And so, if you want talk about inventory, this is how we manage it. And we have a long life cycles. And as long as we see it grow, growth the top line, grow the EPS. I don’t care the rest of it.

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

Hey, guys. Congratulations on the nice results for June, and particularly strong guide for September. I just wanted to start with the September quarter. Is there anything in particular, any one end market where you’re seeing particular strength leading to that guide, or is it pretty broad-based? And I’ve got a couple of follow-ups.

It’s pretty much of broad-based, all the growth areas we cover, in the last few quarters the story remains same, we’re very -- with the very beginning. And all the product ramping is across the board.

Do you guys still feel pretty comfortable with hitting that 8% to 10% share of the server power management market by -- or for all of 2018.

Yes. Our expectations for the server market have really have not changed in the 18 months since we started discussing on those terms. We’re seeing very positive results and very good acceptance and continuation of good volume.

And I just wanted to ask, some others in the industry have been constrained by the supply of ceramic capacitors and passive devices. And just wondering, if you’ve seen those same constraints. If so, are you doing anything to try to avoid some of those constrains, possibly purchasing passive devices that you can sell as part of your solution to the customers or any thoughts on the supply of passives and whether it’s impacting your business?

Yes. It does impact our business. And a lot of products ramping are just not as high as we expected. And we’re looking heavily at design around without using the capacitors.

And then lastly, for you Bernie, you mentioned the step-up in spending here to qualify two 12-inch boundaries. It sounds like that might be a two to three-year phenomena. Does that take you above the OpEx as a percent of sales in that range of 50% to 60%, or do you still think you can kind of target that 50% to 60% OpEx growth as a percent of revenue growth?

I think, for a brief period of time here, and I don’t know how many quarters necessarily that’s going to be. But, while we’re ramping and qualifying the two fabs, we will be beyond what our model is. But we’re very conscious of the need to get operating leverage and return spending down to the 50% to 60% of revenue growth. But, I’d say that probably for the next four to five quarters, maybe six, we’ll probably be above that level.

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

I guess, maybe I’ll start off with the ecommerce question, maybe an update on the progress there with that effort. I know, you are already adding some customers. I’m just curious what feedback has been. Maybe if you could quantify what that opportunity looks like for you guys over the next couple of years. I know that’s tough, but put some kind of -- quantify somehow I guess. Give us a TAM, kind of what you -- how you guys look at that?

Well, I can answer your first question first. The website is up, and it still looks pretty shitty, but we will improve it later. And we do have orders come from our own website. And the programmable modules that we are pushing out there and trajectory -- we cannot even predict, because this is from nothing to something. And we look at the numbers. And in last couple of months, it’s better than I expected. So, we keep evaluating. So, stay tuned.

Okay. But for now, I assume -- we are keeping it out of the model for now I guess?

Yes. We…

Yes, keep it out of that model.

We kept revenue expectations, maybe conscious effort to keep them low for ‘18 and ‘19. And really, what we're trying to do is get up to speed and what it takes to market and successfully manage the ecommerce experience. And during this time, we will also be adding more products and getting traction with customer acceptance.

Got it. Then, maybe switch gears to 48 volt core power. I know, in the next couple of years, you guys have talked about 48 volt coming to GPU and CPU. I guess, maybe if you could walk us through what the timing looks like of that? Who you are likely to compete with there? I think GPU probably ramps before CPU. So, maybe what has to happen for that to go?

Yes. We expect hitting the main stream in the early or mid 2019. And we have been looking at it -- we have been developing that product for last three years. And we see this as an eminent solution for the future of servers. I can't answer who do we compete with, because there is no such a solution out there. And maybe there is a few. And our solution will be hit -- mass produced and easy to use. And we see -- in the last few years, we see we have many design wins.

And just to add real quickly, as Michael said that we’ve had this project under development for three years. And I think that there are a couple of data points in the market today that validate the timing of having our solution released in the 2019 was a good set of circumstances for us. We're in the right place at the right time with the 48 volt solution.

Got it. And then, just a quick clarification question, if I could, on 300 millimeter. Where do you guys stand today? I mean, do you have any design wins on 300 millimeter or is that still on the comm? And then, maybe if you could update us on the ramp of any design wins at 55 or 65 nanometer?

These are some of the stuff we're hitting the market very, very soon, and I don’t know it is the first shipment or we certainly sampling it.

Slightly different development track where the 55 effort will probably have design wins early in 2019 and the 300 millimeter will probably be more out in the 2020.

Your next question comes from William Stein with SunTrust. Your line is now open.

Great, thanks for taking my questions. Congrats on the very good results and outlook. I wanted to return to the comment about hedging for potential upside in the second half. Is there a particular end market that that's weighted towards? And likewise, would you anticipate a sort of the variability in potential upside to be more of a Q3 event or is there something special in Q4 that we should think about? And then, I have a follow-up, if I can.

Yes. I think that as we said on the call that there's really three or four key areas that are driving a lot of our business. And within that what we've tried to do is we're working within a range of expectations for any one of those. And generally, what we’ve done is we've modeled in our revenue expectations the midpoint or below, but we've provided the inventory at the upper end of the range that has been provided to us by the OEM or from the end customer. So, it is really could be any one of the opportunities in computing and storage or automotive in particular where we could experience a pop.

Thanks, Bernie. I appreciate that. And maybe backing up, you offered initial take on e-commerce. I wonder if there's any change in the customer traction relative to the E Motion product.

It's a family -- E Motion, a lot of them I see, we are rather selling the ICs and we're selling the total solution. And it is a lot better way, a lot easier way to generating revenues or to service our customers that we learned from -- I learned from the last couple of years. And so, I see this is the same kind of -- ramping [ph] to the same kind of things.

And on E Motion, that is starting to ramp very nicely right now, and we've seen a lot of design wins that we have, not just in ‘18 and ‘19 but even ‘20 and ‘21 that we're already going to be benefiting from. So, that is an initiative that we started in earnest about four years ago, and that's how long it takes for these things to ramp, whereas the e-commerce platform and the field programmability offered on it, we're just in the very early stages of that.

Great. Thanks for that clarification and congrats again on the good results and outlook.

Thank you.

Your next question comes from Tore Svanberg with Stifel. Your line is open.

Thank you. Congratulations on hitting all those records. First question, the 12-inch fab, I understand the OpEx of top of it. But, how should we think about that impacting your gross margins over time? Because I would think that that could potentially be pretty accretive to your gross margin.

Yes. Tore, you covered us for a long time and you know that our patterns is that we move from early days to go to 16-inch [ph] and then we go to 8-inch, with the first 8-inch was a 0.35 micron fab. And until these are 180 nanometer fabs, depreciated further, then we moved there. So, each step we move to a new foundry or new advanced fab that it doesn’t impact the margin immediately. And so, those 12-inch fabs are still expensive. But three, four years later, that will be cheaper. So, we just follow our history, we repeat and repeat the same thing. By that time we have the superior technologies and good cost.

Very good. And I believe last quarter your ASPs were of sort of in the high single digits. Is there a number you could share with us for this quarter?

Not at this point. But what I can tell you is that the ASP delta has a lot to do with our mix of business. And many of these new opportunities that we’re going into have ASPs that are 2, 3 and 4 times what some of our legacy products, particularly in consumer used to be. So, I think that you're going to see missing bias as the higher percent of our businesses is with these newer opportunities.

And just last question on automotive, it sounds like there could be some pretty major upside there next -- in the second half of the year. If we think about the confidence you have in the car, so far I think it’s been primarily in lighting and also in some of the USB powers stuff like that. Is there some new incremental content other areas that could come already in the second half of this year?

Actually as far as the technology that we’ve introduced in the automotive, it really is centered around the infotainment, the USB-C ports and the body controls. Interesting, the lighting, we’re just at the very early stages of that. And so, over the course of the next 12 months, I think you’re going to see the ramping in the body control and then little bit after that in lighting.

Your next question comes from the line of Alex Vecchi with William Blair. Your line is now open.

I guess, just moving back to the increased expenses on the fabs. Bernie, you said that was gone for four to six quarters, and you guys just gave a 2021 sort of operating margin target at your analyst day. I assume you’re still -- those targets are still intact and these increased expenses were obviously planned at that point.

Yes. What we have been looking to do, and we’ve been sort of trying to provide some soft guidance on both the timing and order of magnitude. And now, we are starting to see those investments translate into the P&L here. But, the overall commitment to manage our core business outside of -- I’m not going to describe these as onetime costs necessarily, but this is a project-related. And those will wind down and that will allow us to get to the targets that we set for ourselves.

Here we see the opportunity to grow and we will grow in the next two, three years. And we have a lot of opportunity. So, we made a decision, so we are going to increase it. And to increase our expenditures and investments rather to -- in a new fab. So that we don’t have -- we won't have the capacity issues. And the same, I’ll keep our technology advance forward. And just look at last year and early this year, MPS did not have capacity constraint. We grow as normal. So, we spend our money wisely. And as long as we grow -- again, I only care the topline and EPS. I care the rest of it less.

And then, as far as characterizing what we provided at the analyst day, those are guidelines. So, for example, in the revenue, we want to be able to grow at 20%. And in this case, with the midpoint of the guidance that we’ve offered for Q3, as well as what we've done in Q1 and Q2, we are several percentage points above that this year. So, you really have to look at the guidelines that we've offered in the business model as sometimes it will be above it, sometimes will be below it. And then, the thing to focus on is we only provide guidance one quarter ahead at a time.

To be fair, okay, if we grow less, we will spend less. And now, this -- we are accelerating our growth. We cannot grow in the thin air.

Understood. Are you guys seeing sort of the seasonality of your business change as you become more broad-based? I mean, obviously, your Q3 is sort of in line with normal seasonal. I know don’t guide Q4. But given some of the upside opportunities you guys have been describing, how should we think about seasonality as we look out into the out year as well?

Yes. I’d say that by and large, we are looking to maintain to maintain seasonality, the way we've been historically. Now, having said that, Q1 came in higher, there was a lower step down from Q4 to Q1 than we had experienced. And as a result of that, the increase from Q2 -- from Q1 was also lower than we've historically done by about 3 percentage points. But then, in the guide that we’ve given here for Q3, that's almost right down the middle of how we performed in the past.

Yes. Our seasonality is changed, in the last year -- as business changed, and also we are in a higher growth period. So, the last year, we had four consecutive -- I think is it right? Four consecutive growth, it never happened since 2004-2005. And so, I can’t tell you what is our seasonality anymore.

[Operator Instructions] Our next question comes from the line of Matt Ramsay of Cowen. Your line is now open.

Hi. This is Josh Buchalter on behalf of Matt. Thanks for taking my question and congratulations on the great results again. Firstly, I'd just like to dig a little bit more on the storage and compute bucket. Is there any more granularity you could provide on some of the moving parts within the quarter and maybe the guide, given your large socket wins there?

Again, it’s a story of -- we have too many riches, because all of the major product lines that we’ve gone after in the computing and storage are doing very, very well. And in the guide for Q3, that just reflects a continuation. And so, it’s a situation where a lot of the technology that we invested in developing are now coming into the market. So, if you focus on the servers for example, that transition has rolled out almost identical how we expected it. And right now, we don't see any headwinds. In fact it's continuation of tailwinds.

And then, you provided an update on E Motion and ecommerce. I was hoping maybe you could provide the same on field programmability.

No. This is tied together, the ecommerce of course is wider than we do some of the products that are not programmable. And currently, I think that we sell most of the products that is kind of fixed, and because the website was late. And now we have the capability to reprogram the product, reconfigure the product. So, these are the things to me, ecommerce and we -- feel programmable.

And I think that as we look at the continuing demands in this area is that we're going to take even larger number of our product catalogue today and reengineer it around field programmability, which offers our customers the best ease of use and time to market.

I'm showing no further questions in queue at this time. I’d like to turn the call back to management for closing remarks.

I'd like to thank you all for joining us on this conference call and look forward to talking to you again during our third quarter conference call, which will likely be at the end of October. Thank you, and have a nice day.

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.