Earnings Call: Q4 2019

Feb 5, 2020

Ladies and gentlemen, thank you for standing by and welcome to Monolithic Power Systems 4th Quarter 2019 Earnings Conference Call. At this time, all participants lines are in a listen only mode. After the speakers' presentation, there will be a question and Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Monolithic's CFO, Bernie Plaggett. Please go ahead, sir. Thank you very much. Good afternoon, and welcome to the 4th Quarter 2019 Monolithic Power Systems conference call. I'm joined today by Michael Singh, Onelisix, CEO and Founder. 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 1, 2019, and Form 10 Q filed on November 1, 2019, both of 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 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. Would refer investors to the 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 1 year, along with earnings release filed with the SEC earlier today. For the full year 2019 NPS achieved record revenue of $627,900,000 growing 7.8% from the prior year while our industry segment experienced a significant downturn. As always, we executed our strategies consistently. In recent years, especially in 2019 more and more 1st tier companies recognized MPS's superior technologies as well as our Our objective is to successfully manage our expenses to support Here are a few highlights which we achieved in 2019. Introduced Leading Edge system solutions using QS Mod Technologies for GPU based artificial intelligence and machine learning applications. Introduced 48 Volt QS Mod technology for both cloud based and automotive applications. Coupled with our design wins in QS Mod and AI applications, MPS is at the early stage of this important revenue ramp. Won a major contract to support a Tier 1 automotive supplier, which will begin generating revenue in the next 2 to 3 years. Successfully co developed cutting edge solutions for smart driving systems and lighting applications. Began volume shipments of high current programmable power modules for communication applications such as 5g Networks, entered the high performance analog market with the formation of a high precision data acquisition business group With input from our customers, we have completed the detailed product specifications. We expect to release these products in 2020. The initial revenue ramp is expected to begin in 2021. The rollout of these advanced products will mark MPS' introduction in the highly profitable, high speed precision data acquisition market segment. We understand the road to success may not be smooth. However, we believe our commitment will payoff in the long term and our shareholders will be pleased with the results of these efforts in the coming years. Except there is one item worth pointing out. We deliberately reduced our inventory in Q3 and Q4 2019, which in hindsight was not necessary. As a result, our current inventory level is too low for MPS to maximize our growth in the next few months. Although we can still keep up our growth rate as in the past, we unfortunately may not be able to take full advantage of all the potential upside. In order to fulfill customers' demand in the second half of 2020, we now have to commit tremendous effort in order to accelerate our schedule to bring up a second 12 inch fab. This has created an unnecessary hardship for our team. Turning back to our full year 2019 revenue, by market segment compared with 2018 communications revenue up 20.1%, computing and storage up 18.9 percent, automotive up 12.8% and industrial up 12.3%. Consumer revenue was $30,100,000 over the prior year This 18.9% increase primarily resulted from strong sales growth for cloud computing and high end notebooks. Computing and storage revenue represented 30.1 percent of MPS's total revenue in 2019 compared with 27.3 percent in 2018. Communications revenue grew $14,200,000, to $84,800,000. This improvement was primarily due to initial ramping of 5G infrastructure sales. Communications revenue represented 13.5 percent of our 2019 revenue compared with 12.1 percent in 2018. Automotive revenue grew $10,200,000, to $90,300,000 in 20 19. This growth primarily represented increased sales of infotainment, safety, and connectivity application products. Automotive revenue represented 14.4% of MPS's full year 2019 revenue compared with 13.8 percent in 2018. Industrial revenue grew $10,900,000 to $99,400,000 in 2019. This growth reflected sales for applications in power sources, security, and industrial meters, industrial revenue represented 15.8% of MPS's full year 2019 revenue compared with 15.2% in 2018. Consumer revenue fell $19,900,000 to $164,200,000, with the exception of home appliances and wearables, all major consumer markets decreased between years. Consumer revenue represented 26.2 percent of MPS's full year 2019 revenue compared with 31.6% in 2018. Switching to Q4, MPS had a record 4th quarter with revenue of $166,700,000, 1.2% lower than revenue generated in the third quarter of 2019, but 8.6% higher in the comparable quarter of 2018. By market segment, revenue for computing and storage grew 27.8% year over year. Automotive grew 8.6% and communications grew 8.5%. Industrial was essentially even with Q4 2018, while consumer revenue fell 5.7% from the prior year. 4th quarter 2019 GAAP gross margin was 55.1 percent 10 basis points lower than third quarter of 2019, but even with margin reported in the fourth quarter of 2018. Our GAAP operating income was $30,700,000 compared to $30,000 reported in the third quarter of 2019 $33,100,000 reported in the fourth quarter of 2018. 4th quarter 2019 non GAAP gross margin was 55.5 percent, 10 basis points lower than both third quarter of 2019 4th quarter of 2018. Our non GAAP operating income was $50,800,000 compared to $51,400,000 reported in the prior quarter and $46,600,000 reported in the fourth quarter of 2018. Let's review our operating expenses. Our GAAP operating expenses were $61,200,000 in the fourth quarter compared with $63,100,000 in third quarter of 2019 $51,500,000 in the fourth quarter of 2018. Our non GAAP 4th quarter 2019 operating expenses were $41,800,000, down from the $42,500,000 we spent in the third quarter of 2019 but up from the $38,700,000 reported in the fourth quarter of 2018. On both a GAAP and an non GAAP basis, 4th quarter 2019 litigation expenses were $991,000 compared with a $692,000 expense in Q3 twenty nineteen and a $409,000 expense in Q4 2018. The differences between GAAP and non GAAP operating expenses for the quarters discussed here are stock compensation, our stock compensation and income or loss from an unfunded deferred comp plan. Fourth quarter 2019 stock compensation expense, including $574,000 charged to cost of goods sold, was $18,700,000 compared with $21,300,000 recorded in the third quarter of 2019. Switching to the bottom line. 4th quarter 2019 GAAP net income was $32,400,000 or $0.70 per fully diluted share compared with $0.64 per share q44 2019 non GAAP net income was $48,400,000 or 1 point and $0.04 per fully diluted share compared with $1.08 per share in the third quarter of 2019 and $0.99 per share in the fourth quarter of 2018. Fully diluted shares outstanding at the end of Q4 2019 were 46 point $5,000,000 and investments totaled $458,500,000 compared to $422,000 at the end of the third quarter of 2019. For the quarter, MPS generated operating cash flow about $61,000,000 compared with Q3 2019 operating cash flow of $72,400,000. 4th quarter 2019 capital spending totaled $8,700,000. Accounts receivable ended the 4th quarter 2019 at $52,700,000 or 29 days of sales outstanding compared with the $58,300,000 or 31 days reported at the end of the third quarter of 2019 $55,200,000 or 33 days reported in the fourth quarter of 20 18. Our internal inventories at the end of the fourth quarter of 2019 were $127,500,000 down from the $135,600,000 at the end of third quarter of 2019 days of inventory fell to 155 days at the end of Q4 2019 from 163 days at the end of the 3rd quarter of 2019. Before turning to our outlook for Q1 2020 would like to remind everybody First, we target to grow revenue at a rate that is 10 to 15 percentage points greater than our peers. A year where the market is expected to grow between 5 to 20%. 2nd, we target quarterly gross margin to grow by 10 to 20 basis points sequentially 3rd, to ensure continued growth, we target increases in our R&D And SG And A investment at 50% to 60% of the annual revenue growth rate. Finally, we expect to return 30 percent to 40 percent of the company's annual free cash flow to shareholders. This long term financial model is an important tool in setting expectations for accelerated revenue growth and providing operating leverage, while allowing for a proper level of business reinvestment. I would now like to turn to our in Q1 twenty twenty revenue in the range of $161,000,000 to $167,000,000. We also expect the following: GAAP gross margin in the range Non GAAP gross margin in the range of 50 total stock based compensation expense of $18,000,000 to $20,000,000, including approximately $600,000 that we'd be charged to cost of goods sold. GAAP R and D and SG and A expenses between 58.4 and $62,400,000. Non GAAP R and D and SG and A expenses to be in the range of 41.0 $43,000,000. This estimate excludes stock compensation and litigation expenses. Litigation expenses to be in the range as MPS prepares for an upcoming trial, which is set to begin at the end of March. Interest income is expected in the range to range from $1,500,000 to 1 $700,000 before foreign exchange gains or losses. Fully diluted shares to be in the range of 46,200,000 to 47,200,000 shares. Finally, we are pleased to announce to $0.50 per share from $0.40 per share for shareholders of record as of March 31, 2020. In conclusion, we will continue executing on our strategy and winning market share. Thank And our first question comes from Jeremy Kwan with Stifel Nicolaus. Your line is open. Yes, good afternoon and congrats on the strong results and outlook, especially in the environment. I guess my first question regarding you mentioned about not having sufficient inventory on hand to meet all the immediate demand you're seeing. Is there a way you can kind of quantify what's kind of being left on the table? And is there a chance to capture this maybe later on in the coming quarters? All these products, we just designed it in and our customers have a upside. There's many of us, many of them they told us So, we believe that, okay, these sockets are difficult to change and they're not changing it can change month by month. And, those volumes still will be with us. Yeah, we're not trying to identify a risk factor of with regard to our ability to execute against expectations. We're just saying that it would be imprudent for us to allow our investors to believe that there's even more upside beyond that because we may have some constraints with regard to inventory. Yeah, our inventory is we involve a few thousand products and very difficult to predict which one is the rent ahead of which one is the rent first. And, so that causes a lot of lot of problem for our planning and also for our shipments. We're now doing partial shipment. Great. Thank you very much. That's a helpful clarity. And I guess my follow-up would be Bernie, you mentioned entering the high performance analog market with the high precision data acquisition group. Can you give us some more details about this? Maybe you and Michael, maybe what initial applications are going to go after first and how you plan to compete in this market. And maybe your sales strategy, do you need more distribution partners or is this something that you can leverage your e commerce platform? Thank you. The initial one is in the these are initial market segments there in the communications and as well as as well as medical applications. And, we don't, we don't have a long term long term strategy. I think it's through our internet, so our e commerce. And we try to push everything through e Commerce again. Great. Thank you very much. Thank you. And our next question comes from Alexandra Voci with William Blair. Your line is open. Great. Thanks. Congratulations on a wonderful quarter. Just on, 40 volts you talked about the new product introductions in 2019. And I believe you guys said on the last earnings call that you'd be seeing some revenue in Q1 Can you just update us on that and how we should think about the total revenue opportunity there as we look into 2020 2021? Yeah, I don't think that we guided per se on giving an exact revenue outlook for Q1 with beginning of 48 volt. But we said that it would be in 2020. And right now, it everything is tracking pretty much along our expectations. So what's really exciting is that I think that it validates our strategy to have gone into 48 volt and to enjoy and participate in many of the opportunities that are brings us. Okay. That's helpful. And then I apologize as if I missed it, but Bernie, did you give us a little bit of clarity in terms of by segment in Q1, what segments maybe you thought would be the strongest sequentially? Yeah. Again, I think the broader question there is, what's going to be, what are the revenue drivers looking like. And at this point, I think it's a continuation of more of what we've been seeing recently. So for example, the computing storage market is very well positioned for growth in the early part of the year. Likewise communication, we believe that there's also a significant opportunity for growth, particularly in Q1. When you look at, or I should make 11, asterisk on computing, notebooks, which are we report in computing, are seasonal. And coming out of Q4, they tend to have a seasonal decline, which we are anticipating as well. But when you look at storage or cloud computing, I think that we're very well positioned. And then after that, if you look at consumer, Again, that still has not hit a steady state or shown any signs of being healthy. And again, consumer is also very seasonal and it's normal to expect a decline from Q4 to Q1. Then when you look at industrial, a lot of that was revenue performance, particularly in the second half of the year, reflected inventory bills on the part of certain of our customers, who are anticipating trade restrictions And so that area may fall off in Q1. And automotive, that tends to go either the plateau or when it gets designed in the new revenue opportunity, there's a spike. Okay. Just on automotive, some other semiconductor companies have alluded to sort of a bottoming out improvement there. So are you seeing a similar situation? I know it depends on what model you're designed in and whatnot, but do you feel like the worst is behind you? I think we are too small to call the industry. We're growing to all these greenfield markets and the least things that we said that this is the end of the world or this is the beginning of the world. Is a beginning and there were for NPS. Understood. That's it for me. Thank you so much. Thank you. Our next question comes from Michelle Waller with Needham. Your line is open. And congrats on the results. So I guess the first one for me is, in terms of the next generation gaming, console is launching in 2020. Could you guys walk us through what the ramp is expected to look like for MPS? Is it only a back half driver or do you think you'll see some meaningful uptick in 2Q? And from a gross margin perspective, how should we think about the impact to, corporate gross margins during that ramp? Are you talking about gaming, particularly? Yes, specifically, yes. Gaming is a not a major part of our business. And that is all linked into the one product is in a consumer segment and it is in the in a share, the similar CPU core power. And the business is very lumpy. And but we treat this very opportunistically. And our customers really like our solutions and that we will support them when the when the demands come? We would probably expect to see a similar ramp as we did in 2017. Okay. That's helpful. And then for my follow-up, you guys mentioned previously that your dollar content opportunity with the Whitley, server platform increased to $70 from $50 in the Pearly platform. I'm just trying to figure out know this is a bit further off, but with the equal stream platform that's expected to launch in 2021, how do you guys see your dollar content opportunity changing generation over generation or just any color you can give there would be helpful. On the dollar content, we don't we haven't seen an opportunity to expand beyond We currently are getting on the V14. But then again, the specs are not entirely finalized So if it turns out that the space of the power requirements are materially different from what the V14 is, there might be an opportunity for pricing leverage. Thank you. Thank you. And our next question comes from Matt Ramsay with Cowen. Your line is open. Hey guys, this is Josh Buckalter on behalf of Matt. Thanks for taking my questions and congrats on the results in a tough environment I guess the first question was, if you think about your inventory commentary from last quarter, are there any couple items in particular that you could point to that drove the change in your thought process from 3Q to 4Q. And then also, is there any margin impact from bringing on the new 12 inches fab? And you're sort of what sounds like capacity constraints? Well, we're talking about margins. And if you were 12 inches fabs, okay, every time we're bringing up a fab, is it not and we won't have a very immediate impact for the margin improvement. These are product these are product from the newer fab is always a year or 2 years down the road. In terms of which segments of a way where our inventory is tightened again, it's actually across the board. Got it. Thank you. And I guess in the beginning of the call, you mentioned several Tier 1 companies launching with your design wins. Were there any I guess if you could rank order 1 or 2 that you're most excited about heading into 2020. Thank you and congrats again. These are, we said that Bernie said it at the beginning of a call. Okay, these are things these are the there's a few things that we achieved in the 2019s and all of these awards generated significant revenue in 2020. Yes. And it's not restricted to any one end market segment. It's actually very broad based to the level of the customer engagement that we're receiving from Tier 1s. Thanks guys. Thank you and our next question comes from Rick Schafer with Oppenheimer. Your line is open. Yeah, hi guys. I'll echo everyone else's congratulations on another another monolithic quarter, another great quarter. So good job. I just had a maybe a question. On coronavirus, since it's a topic as you're, you guys have 3 of your 4 production, foundries in China. So I'm just curious, Michael Laverne, if you're seeing any signs of supply disruption, or do you expect see any signs once guys start coming back to work next week? All the fabs as far as the windows, they are all open. They're all operating and they're in a really tight conditions, okay. And all the assembly, same things. And again, and, so so far, and it really hasn't disrupted our supply. And again, Rick, it's a very early stage to really fully appreciate or understand how any of our businesses will be impacted. Sure. Sure. I understand. So maybe a follow-up if I could. Just on your auto biz, I know you guys secured 1 of the think the number one Tier 1 auto supplier a few months ago, I'm just curious where we stand on securing the number 2, tier 1 auto supplier, you know, and as part of your answer, I'm curious. I mean, from after you sign number 1, have you seen is it too soon to have seen any noticeable uptick in design activity? And maybe also just a comment on China in general. I know that I'd be interested. I know that it was kind of a slow year for China auto basically canceled the design here, I think, last year or the model year. I'm curious kind of what your expectations are for China this year and what you're seeing? Thanks. Well, okay, but overall, I mean, everybody told us, okay, all those will not be a good year, but from the NPS side, we're looking pretty good for 2020. And All these number 1, number 2, number 3, okay models, and we are deeply engaged and we see all the activities that we the more than we can handle it. And now we have to pick and choose Got it. Thanks Michael. Thank you. And our next question comes from Ross Seymore with Deutsche Bank. Your line is open. Hi guys, this is Melissa on behalf of Ross Congratulations on the really solid quarter. I know you guys don't guide out more than 1 quarter, but I guess from a high level perspective now that we're coming out of this industry downturn, what are your expectations for returning to either seasonal or even above seasonal growth. Is this moderated by what by your inventory constraints? And how are you thinking about the slope of the recovery from here? Well, you call the industrials out of the downturn Camey. And as you said, as Bernie said earlier, so we will grow above the industrial market, okay, plus what's your upturn and about 10%, 15% to 20%. So we're committed on that. The inventory constraints, is that kind of restricting that growth prospect or do you think you can still kind of hit that target? We try to and it's we couldn't, as I said earlier, we cannot maximize it because our customers are pulling in those pulling the requirements. Okay. And so, we have to keep them line up and we have partial shipment. And that's our inventory is in a very low stage, okay. Got it. And then the last one for me is your computing and storage segment has been driving really strong growth. And I was just curious when you look into 2020, how are you thinking about the shape of that business? And in particular, are you worried about any risk of inventory digestion of won't be buying or do you think that it's really strong secular growth that's driving the strength? Yeah. When you look at 2019, I think that first half of the year was an anomaly where the hyperscales were trying to digest excess capacity. And so I would see with the V14 having been just recently rolled out, a return to a more normalized adoption process. Thank our next question comes from tory Svanberg with Stifel. Your line is open. Yes, thank you and congratulations again. Very, very nice results. First question on inventory being tight I mean, you're at 156 days. So how tight is it? I mean, I know you want to run a little bit higher than that, but it doesn't seem alarmingly low either. So, maybe you could just elaborate a little bit on that. I think we're at 155 days right now. And if you were to look at sort of the industry standards, we're probably in and about the midpoint range of what people might expect. There's 2 things though that differentiate us. The first is the diversity of the number of products that we maintain And then the second is that we build inventories ahead of when we sell them. And as a result, because we're growing at a rate that is 10 to 15 percentage points faster than the industry that puts more pressure on us to have more inventory available at an earlier stage. So, it's as much a risk management decision with the level we carry. And I think that we've said previously that we're more comfortable with inventory levels between about 160 days to 180 days. Stagnant companies. Inventory, yes, is very predictable for the growth company and we have a particular for NPS. We have, if it's not thousands, we have 100 projects and that they are taking off. And some of it is faster, other one is slower. How do we pick on those? Very difficult to call. Well, it's a good problem to have. 2nd question, and I always ask Michael, if you could give us an update on your e commerce business, we've noticed that the website keeps changing So if you could update on us, that'd be great. Thanks. The e commerce side, okay, other than NPS or website e commerce, so that's And those, we're still learning from that ones. And okay, but our product to sell to the 3rd party's e commerce starts doing really well. And So, as a result of learning and we're changing it, you see that, you see that, our websites. And so far, we can't give you the significant number yet, but fields in the end of 2020, I think that they will move some needles. Great. So, at least you're now seeing that the traffic really moving in the right direction sounds like? Yes. The key is the traffic. But yeah, the key is the traffic. So we can I can give you an analogy is we believe became a year ago we believe that like a there's a lot of fishing in the Pacific Ocean? So, we dropped the fishing in the middle of a Pacific Ocean. We didn't cover anything. And now we're learning, we are we're fishing what kind of fish, where are they? We're a lot more targeted So, we went through we have gone through the phase, okay, we're not lot more targeted now. Very good. Make sure you have enough bait. Last question on the emotion business. If you could also update us there, including obviously your system level motor products? Yes. So the model is that the intended is just not selling a model, okay, and the intended provide as it provides a convening for for our customers for their initial, ramp. So, okay, we Those business at the very beginnings and I go through, we see quite a few orders from our internet And then, typically, those customers are going very slow. And I mean, that their project takes a year and a year and a half. And to ramp. It's not like they're selling a silicon pieces. Okay. And usually, a models, the guys that takes about 3 or 4 years. And, in terms of eemotions, we have, I don't know what the Bernie, maybe you can say it is, okay, there's a $20 some $1,000,000 this year, more than $20,000,000. This year, we're going to keep up a similar growth rate. And again, and, so it would be certainly it would be a $30,000,000 or $40,000,000 okay. I think that we're comfortable in saying that it can be a $30,000,000 or $40,000,000 business here in the next few years. I think though that Michael makes a very good point as far as the length of time between adoption and when you actually generate revenue, many of those applications, almost have characteristics similar to automotive. Very good. Congratulations again. Thank you. Thank you. And I'm showing no further questions at this time. To Bernie Glagen for any closing remarks. Thank you. I'd like to thank you all for joining us for this conference call and forward to talking to you again during our first quarter 2020 conference call, which will likely be in April. Thank you, and have a nice day. Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect. Everyone, have a great day.