Monolithic Power Systems's (MPWR) CEO Michael Hsing on Q2 2014 Results - Earnings Call Transcript

Jul.24.14 | About: Monolithic Power (MPWR)

Monolithic Power Systems (NASDAQ:MPWR)

Q2 2014 Earnings Conference Call

July 24, 2014 5:00 PM ET

Executives

Meera Rao - Chief Financial Officer

Michael Hsing - Founder, Chief Executive Officer

Analysts

Tore Svanberg with Stifel

Vincent Celentano - Raymond James

Rick Schafer - Oppenheimer

Anil Doradla - William Blair

Lena Zhang - Baylock

Mike Lucarelli – Evercore

Amit Chawla - Wells Fargo

Operator

Good day, ladies and gentlemen and welcome to the Monolithic Power Systems Incorprated Second Quarter 2014 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 follow at that time. (Operator Instructions). As a reminder this conference call is being recorded.

I would now like to introduce your host for today’s conference Meera Rao, Chief Financial Officer. Please go ahead.

Meera Rao

Thank you. Good afternoon and welcome to the Second Quarter 2014 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 5, 2014 and our Form 10-Q filed May 1, 2014, which is accessible through our Web site www.monolithicpower.com.

MPS assumes no obligation to update the information provided on today’s call.

We will be discussing gross margin, operating expense, operating 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 Q1 and Q2 2013 releases, the Q1 and Q2 2014 releases, as well as to the reconciling tables that are posted on our Web site.

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 Web site for one year along with the earnings release filed with the SEC earlier today.

MPS again delivered record breaking quarterly revenues. And more importantly MPS achieved greater than 50% year-over-year growth in both non-GAAP operating income and non-GAAP EPS. Revenue grew 18.6% compared with the same quarter of 2013 to $68.4 million. This increase which is well above the industry average was fueled by organic growth in revenue from our industrial and newer consumer markets. Non-GAAP gross margin expanded by 70 basis points to 54.5% in Q4 2014 from 53.8% in Q2 2013.

We continue to grow the business while holding expenses relatively flat by leveraging the infrastructure investment made over the last few years. This has resulted in a significant 54% year-over-year growth in both non-GAAP operating income and non-GAAP EPS.

The strong organic revenue growth is attributable to our efforts initiated four years ago when we set our goals to diversify our products. To further enhance our growth strategy, we have acquired Sensima Technology SA, a Swiss company.

Sensima is a developer of magnetic sensor technologies for angle measurements as well as three-dimensional magnetic field sensing. Sensima’s patented magnetic angle sensors are used in rotary encoders, electronically commutated motors and a broad range of products.

Combining Sensima’s real time precision magnetic angle sensing with MPS’s technologies could offer revolutionized solutions for key industries such as automotive, industrial and cloud computing. We believe Sensima’s unique technology will enhance our diversification strategy and create new opportunities with key customers.

Turning to the deal terms; MPS has acquired all of the outstanding shares of Sensima. The purchase price includes an initial cash payment of $11.7 million, and a subsequent cash earnout payment of up to $8.9 million, which will be based upon Sensima achieving certain performance goals in 2015.

Sensima is a free revenue company. We expect this acquisition to be accretive in the second half of 2015. The initial cash payment was paid with offshore cash and any future earnout will also be paid with offshore cash.

Now a quick a review of other recent business activities, in the past MPS’s demand creation and sales efforts was driven mainly by our internal sales force. Now we are accelerating these designing activities through the addition of two key distribution partners. We have added Future and Avnet Memec for coverage in North America and Europe. These partnerships will multiply the number of sales and field application engineers focused on selling and promoting MPS products. At the same time, we have been seeing significant design win momentum, new product ramps and market share gains in battery management, cloud computing, and industrial applications.

Turning to the financials, our second quarter revenue of $68.4 million was well above the midpoint of our guidance, compared with the first quarter of 2014 revenue increased by $8.4 million or 13.9% primarily due to growth in the communications, industrials, and consumer market. Looking at our revenue by end market, communications revenue grew approximately $3.4 million over the prior quarter to $17 million, fueled by the ramp of networking and telecom design wins as well as our gateway business. Revenue from consumer market increased $2.4 million to $28.5 million on higher TV and gaming demand.

Industrial revenue also grew approximately $2.3 million to $12.1 million over the prior quarter, fueled by smart meter and other industrial applications. We are pleased to report that industrial revenues now 17.7% of revenue. Computing revenue increased slightly from $10.6 million to $10.8 million.

Moving onto gross margin, our second quarter non-GAAP gross margin was 54.5% compared to 53.8% in the prior quarter. Higher manufacturing overhead absorption contributed 20 basis points of growth. The remaining 50 basis point improvement was attributable to the impact of a special non-executive employee bonus expense in the first quarter of 2014. That was not repeated in Q2. On a GAAP basis our Q2 gross margin was 54.2% compared to 53.4% in the prior quarter. The only difference between the GAAP and non-GAAP gross margin is stock comp expense and the special non-executive employee bonus.

Let’s review our non-GAAP operating expenses. Excluding stock compensation and transaction costs related to the Sensima acquisition. Our non-GAAP operating expenses for the second quarter of 2014 were $21.8 million, an increase of $6.2 million from the $15.6 million we spent in the prior quarter. This increase was largely due to $9.5 million legal payment in our favor from O2 Micro recorded during the first quarter of 2014, as a benefit to litigation expenses. This pickup was partially offset by one-time charges in the first quarter of $500,000 for payments to the law firms that successfully represented as against O2 and special non-executive employee bonuses of $2.8 million.

Moving onto our GAAP operating expenses; our GAAP operating expenses were $30.5 in the second quarter compared with $23 million in the first quarter. The only difference between non-GAAP operating expenses and GAAP operating expenses for these quarters is stock compensation expense and transaction costs related to the Sensima acquisition. Stock comp expense attributable to operating expenses increased to $8.2 million in the second quarter compared with $7.4 million in the prior quarter as a result of a higher charge for pay for performance stock plan implemented from 2012 to 2014.

Accordingly, we are required under the accounting rules to assess the probability of hitting the performance metrics under the plans on a quarterly basis and record catch up adjustments reflecting our two-year revenue projections. As we noted before, this has increased the quarter-over-quarter volatility of stock comp charges compared to the typical straight line approach associated with time based grants. In addition, we incurred approximately $500,000 of legal and the accounting expenses in relation to the Sensima acquisition.

Switching to the bottom line, on a non-GAAP basis our Q2 net income was $14.6 million or $0.37 per fully diluted share. This result is computed with an estimated tax rate of 7.5%. Q2 2014 GAAP net income was $6.4 million or $0.16 per fully diluted share.

Now let’s look at the balance sheet. Cash, cash equivalents and investments were $250.7 million at the end of the second quarter of 2014, above the $238.5 million at the end of the prior quarter, as well as a $201.3 million at the end of the second quarter of 2013. In Q2 MPS generated operating cash flow of about $22.9 million. Cash proceeds from employee stock option exercises, contributed another $3.5 million.

MPS enhanced the $100 million stock buyback program effective August 2013. Under this program we bought back approximately 322,000 shares for a total of $12.4 million in the second quarter of 2014. We also spent $1.7 million on capital equipment. As a reminder, MPS initiated a dividend program in the second quarter of 2014. The $0.15 per share dividend declared and accrued in Q2 was paid on July 15th to shareholders of record at the close of business on June 30, 2014.

Accounts receivable ended the second quarter at $21.4 million down from the $22.1 million at the end of the prior quarter and up from the $20.3 million at the end of the second quarter 2013. Days of sales outstanding were down to 28 days in Q1, from 33 days in Q1, 2014 and 32 days in Q2, 2013. Our internal inventories at the end of the second quarter were $41.2 million, compared with the $39.8 million at the end of the prior quarter. Days of inventory decreased from 130 days at the end of Q1 to 120 days at the end of Q2. Inventory in distributor channel decreased in both dollars and days from the prior quarter.

I would not like to turn to our outlook for the third quarter of 2014. We expect yet another quarter with record revenues. We are forecasting Q3 revenues in the range of $76 million to $80 million. At the midpoint of the guidance we’re projecting approximately 14% growth from the prior quarter.

We also expect the following: non-GAAP gross margin in the range of 54.4% to 55.4%, GAAP gross margin in the range of 54.1% to 55.1%. Total stock based compensation expense of $7.7 million to $8.3 million including approximately $200,000 that would be charged to cost of goods. Litigation expenses of $200,000 to $400,000. Non-GAAP, R&D and SG&A expense to be in the range of $22.5 million to $23.5 million. This estimate excludes stock compensation and litigation expenses.

Fully diluted shares to be in the range of 39.5 million to 40.1 million shares before share buyback. This Q3 outlook validates our overall business model discussed in prior calls as a mid-point of guidance will produce 25% non-GAAP operating margin. In conclusion, as we continue to execute on our growth strategy formulated four years ago, we are delighted to see these early results. I will now open the microphone for questions.

Question-and-Answer Session

Operator

(Operator Instructions). Our first question comes from the line of Tore Svanberg with Stifel. Your line is open.

Tore Svanberg - Stifel

So my first question is on communications and industrial. It had a very strong quarter in Q2. And just wondering if that’s what’s going to continue to drive growth in Q3?

Michael Hsing

I think it is difficult to comment on quarter-by-quarter, but the overall trend is increase because in the past two or three years we have focused on that segment and we generate a lot of design wins. And these design wins turns into revenues and we see a very steady increase in the next few quarters, and in near future. So the next quarter will probably follow the similar trend, but it is not exactly a number but overall direction is same.

Tore Svanberg - Stifel

And on gross margin, you’ve had very nice steady increase now for a while. And as we look forward, I am just wondering if we should expect that similar improvement? And I assume that it’s primarily mix driven or is there anything else going on there?

Meera Rao

We’ve been saying for a while that our gross margin improvement is going to improve slowly and steadily and that’s exactly what’s spanning out. So we have in the latest quarter Q2, we also had because of the big increase in revenue; we also had a pickup from a better absorption of our test manufacturing capacity that we have, the overhead costs. Our mix also continues to improve as the new products come out.

Tore Svanberg - Stifel

Just one last question if I may. Could you update us a little bit on your Monolithic Power Module business? I know that’s revenue primarily is slated for later. But just hoping you could give us an update on reception so far, when you expect more meaningful revenue and so on? Thank you.

Michael Hsing

We introduced, as you know we have we have a matrix of product, in the last quarter we introduced few more. And as the release of these products are kind of difficult, we had to go through a full qualification; every one of them had made a deal about 2,000 hours, so we gradually complete that metrics. In terms of our market, reception is extremely well. Our customers and some customers adopted our module very quickly, and some industrial automotive for traditional markets and they follow the similar trend as they do with other business, which takes about 24 months to 36 months to generate any revenues. But we see a lot of designing activities and there are no surprises.

Operator

Our next question comes from the line of Steve Smigie with Raymond James. And your line is open.

Vincent Celentano - Raymond James

This is Vincent Celentano speaking for Steve. I was wondering within your memory and storage business. I was wondering PMIC is looking really strong lately. Do you see this trend continuing and do you believe share growth is part of that?

Meera Rao

SSD PMIC continues to do well. We expect to see growth in next quarter as some design wins ramp up next quarter, I mean in Q3.

Vincent Celentano - Raymond James

And then within the LED driver market. I was wondering what’s your shares of that and what you see as the growth drivers?

Meera Rao

In the LED lighting market, this is a market that long-term our interest is industrial and the commercial applications. We are playing in the consumer market right now because it’s a good market and it’s very profitable for us. We’re only playing in key segments of this market and not across the board like some of our peers.

Operator

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

Rick Schafer - Oppenheimer

I had a quick question first I think on the Sensima acquisition. I know you talked about being accretive. I think you said on the second half of 2015. When do you guys expect to see first revs from that business? And in the meantime can you quantify the dilution or is it a noticeable impact?

Michael Hsing

I can answer the first part of the question. It’s a small revenue. The key is that we acquire technology, it’s a proven technology and customer accepted it. And so whether you generate $1,000 and $100,000 of revenue, that’s not really important. We see this technology is true revolutionized the motion control. You have mono drivers, you have robots, you have industrials machineries and automotives. And this is really something nobody else has seen it before. And we are glad to find this company and we can beat all. The founders like MPS, and they turn down all the other offers and they join us.

Meera Rao

And the second part of your question Rick. We expect this deal to be accretive by the second half of 2015.

Rick Schafer - Oppenheimer

And then my next question is on mix. Obviously it continues to improve as comps and auto and industrial continue to ramp as a percent. What’s the right split for your guys long-term between your sort of four main buckets? And I am just curious what gross margins are going to look like once we’ve sort of hit that optimum mix?

Meera Rao

For us the three target markets are computing, communications and industrial, and we’d like to grow those markets as much as we can. We don’t have any internal number that we’ve shared. And our idea is that as we go out in time, when it comes to gross margin there are no headwinds and basically we expect to show a slow and steady increase in gross margin.

Rick Schafer - Oppenheimer

And then just I am kind of curious on TV. Can you update us on what your TV exposure is now and maybe elaborate a little bit on the content increase story there?

Meera Rao

Sure. It’s roughly about 10% of our business from TV. And I think we talked about this a couple of quarters ago saying that we’ve got more design wins now in TV and this particularly as you see some of the smarter TVs and some of the power requirements are going up. We’re seeing higher revenues here.

Rick Schafer - Oppenheimer

But can you quantify? I mean is your average content increasing, I don’t know 5% or 10% year-over-year or any kind of number you could put that there?

Michael Hsing

We just focused on that, on the market segment really opportunistic, and some of the newer TVs are smart TV with processor-based TV that requires higher power. And we have product and we have a very cost competitive product and we just take -- in the past we took this bucket. And we have continued to do well in those high current sockets. And because our competitor couldn’t even match what we do. So in terms of a real percentage of what the growth is I put a very little focus on it. And maybe Meera can tell you what is our growth pattern it.

Meera Rao

I think overall what we’ve got is we’ve got more design wins, so you’ve seen the increase in revenue. I would attribute it more to design win increase rather than a dollar content increase.

Operator

Our next question comes from the line of Anil Doradla with William Blair. Your line is open.

Anil Doradla - William Blair

Michael and Meera I have a kind of big picture question. Obviously consumer business continues to do well. You’ve had some benefits from some of the gaming products. But when I look at Monolithic Power one of the key transition stories was to step away slowly from the consumer business and diversify to more longer product cycles infrastructure oriented. Last couple of quarters consumers have been good, last quarter has been good. So how should I be looking at it? Are going to continue working with consumer? But your hurdle rates are going to be based on some higher gross margins? Or I mean can you lay out what the big picture strategy is going forward? And I have a follow up.

Meera Rao

Sure, our overall strategy is to go into more and more markets where they’ll pay as a premium for our products. And if you notice some of the newer consumer markets where we have been seeing higher revenues come in the last few quarters. There have been markets that require higher performance, calling for a thinner competitive landscape. And these are markets like gaming, battery management. These are the markets where we’re particularly seeing our revenues increased.

So while those happen to be in the consumer marketplace, it still plays into our overall strategy of focusing on performance and where we get a premium for our performance. And as you will see out in time, you’re going to see revenue from computing, from communications, from industrial continue to go up.

I don’t know if you noticed, but our industrial revenue is about 17% of our revenue. And just about two or three years ago, it was about 6% to 8% of our revenue. So I think we’re focusing on differentiated products that make a difference to us both from a top line gross margin and bottom line.

Anil Doradla - William Blair

And on Sensima Technology, I mean why did you acquire this? Because I am trying to understand the connection between the Sensima Technology and a power management company. What were the synergies and can you give a little bit more color on that?

Michael Hsing

Yes, I’ll give you a longer version answer. Let’s start it, that’s motion control, all the motion controls are consistent with motors in them. And traditionally all the motors -- for the last century all the motors in building a similar technology in the last 10 years to 15 years and require higher performance motors that are using a microcontroller. So in order to deliver the power accurate and reduced noise and vibration of the motor, these are considered high performance and much costly.

In Sensima Technology we can deliver higher performance motors. By using the Sensima Technology the motors performance will increase greatly and considered even better than any motor drivers in the market now with the microprocessors. So this is a very low cost solution. We can revolutionize the entire motor drivers. So you offered using this solution in lower performance motor can be even better performance than existing high performance motors. So that’s the reason, one of the reason we acquired them.

Anil Doradla - William Blair

And finally BCD3, can you give us a sense what was the contribution and how did that grow during the quarter?

Meera Rao

BCD3 and 4, the revenues continued to be about 50%.

Operator

Our next question comes from the line of Lena Zhang with Baylock. Your line is open.

Lena Zhang - Baylock

So the Company has done real good job on the diversification in the end market, and I believe will continue. How has that impacted your sales in different ranges and how well that impacts as well?

Meera Rao

Essentially, we have done a lot of sales using our existing sales force. And if you noticed in the last few months we’ve announced at least two distributors who will increase the number of boots on the ground, and we believe will lead to future growth and revenue as well. And as you pointed out, we have a broad breadth of products and this just takes the revenue to the next level.

Lena Zhang - Baylock

But in another words, so how should I expect which region will grow faster than others?

Meera Rao

That’s hard to tell, but irrespective way the demand is created almost all the manufacturing ends up in Asia. And if you notice the numbers we report on the sell through region, and so you are going to see Asia revenues grow anyway. But that does not necessarily mean that the demand was created in that region. So it’s kind of hard to answer the question.

Michael Hsing

To answer your question in the industrial market, automotive market takes 2 years to 3 years. So you add more people, the result will be better two years to three years later. It doesn’t change the pattern but change the numbers.

Lena Zhang - Baylock

And in terms of the acquisition of Sensima and is your Q3 guidance -- does your Q3 guidance include OpEx from that, because of the acquisition?

Meera Rao

Yes, we included about, I think just a little under $500,000 in Q3 for the operating expenses of Sensima.

Operator

(Operator Instructions). Our next question comes from the line of Mike Lucarelli with Evercore. Your line is open.

Mike Lucarelli - Evercore

If I look at guidance for 3Q, how does that breakdown by end market. Maybe like I was thinking about which one should go faster or slower than the midpoint of your guidance?

Meera Rao

As I’ve said before when we look at the granularity of the forecast data, it’s not at the same granularity as we get when with actual data. So I can’t comment segment-by-segment, but I can talk about a few drivers that I see that are going to be doing very well for us, SSD for once, we’re going to see growth over there. I expect to see that gaming is going to do well; we’re going to expect to see growth in battery management or in LED lighting. In TV we will continue to see progress over there. I think industrial particularly automotive most probably is going to be a growth for us if you are comparing Q2 to Q3.

Mike Lucarelli - Evercore

What about the design wins you had in server and PC? How is that shaping up?

Meera Rao

In servers we’ll be shipping this quarter and next quarter for revenue. In terms of -- in computing on the notebook side. I think the market is shifting from [shock bay] over to [crescent bay] and we are positioned to do as well if not better in the [crescent bay] than [shock bay].

Michael Hsing

The consumers market we expect to do well in the next two to three quarters or even beyond. So you will see some significant changes in the next couple of quarters.

Mike Lucarelli - Evercore

And then I guess back into the storage PC bucket. That was only one that was down year-on-year. What are the moving pieces within there, is that ACGs falling off a little bit?

Meera Rao

No, it was actually one of the SSD design wins ramp down. But the successor design win ramps up fairly strongly for us next quarter. So it ended up being flat this quarter. I mean computing was flat but SSD within was a little down. But we are going to see that portion go up again in Q3.

Operator

Our next question comes from the line of Amit Chawla with Wells Fargo. Your line is open.

Amit Chawla - Wells Fargo

I just had a quick follow up question. I guess what percent of your industrial revenue at the moment stems from automotive solutions? And I guess what percentage of your industrial mix do you expect automotive to be exiting calendar year ‘14?

Meera Rao

I would say industrial is an area where as I have said before there are multiple markets that make up that portion. Automotive is one of the market that is growing for us. I don’t think we have disclosed in the past what portion of industrial is from automotive.

Michael Hsing

But automotive will be a very significant number, so from this year and going out of this year in to next year. So we may develop that divide it up sometime.

Meera Rao

In the future.

Michael Hsing

Yes.

Amit Chawla - Wells Fargo

And the one final question. I guess as you rollout your broad module product portfolio this year. My understanding is these modules require a higher level of integration. So I guess my question is will this higher level of integration require you to step up spending on capital equipment that’s unique to these modules?

Meera Rao

No, in fact we’ve already released many of these modules. We have few others that are being sampled to customer and the rest of them are in various stages of QA. So we don’t need any equipment from an R&D standpoint.

Operator

I am not showing any further questions at this time. I would like to turn the call back over to Meera Rao for closing remarks.

Meera Rao

I want to thank you all for joining us for this call and wish you a very happy day. Thank you. Bye-bye.

Operator

Ladies and gentlemen thank you for participating in today’s conference. This does conclude the program and you may all disconnect. Everyone have a good day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!