Earnings Call: Q2 2019

Jul 31, 2019

Ladies and gentlemen, and welcome to the Monolithic Power Systems and Q2 2019 Earnings Conference Call. At this time, all participants are in a listen only mode. Also, as a reminder, this conference call is being recorded. At this time, I'd like to turn the call over to your host, Bernie Blegen, Chief Financial Officer. Please go ahead. Thank you. Good afternoon, and welcome to the second quarter 2019 Monolithic Power Systems conference call. Michael Singh, founder and CEO 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 Q2 earnings release and in our SEC filings, including our Form 10 K filed on March 1, 2019, and Form 10 Q filed on May 10, 2019, 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 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 prefer investors to the q22, 2018, Q1 2019, and Q2 2019 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 1 year, along with the earnings release filed with the SEC earlier today. MPS achieved record 2nd quarter revenue of $151,000,000 6.8% higher than revenue in the first quarter of 2019 and 8.0% higher than the comparable quarter in 2018. Looking at our revenue by market. In our computing and storage market, 2nd quarter revenue of $41,600,000 increased $2,400,000 or 6.1 percent from the first quarter of 2019. Computing and storage revenue represented 27.5 percent of MPS's 2nd quarter 2019 revenue. Stories revenue was down from the first quarter of 2019. The computing revenue increased. Nevertheless, the growth in computing was slower than what we had planned for back in the second half of twenty eighteen. The slower than anticipated growth rate was primarily due to customers delaying product launches or absorbing overcapacity. Having said that, our design activity in the first half of twenty nineteen with top tier customers reached an in these critical markets. In our consumer markets, revenue of $43,800,000 increased 14.8% from of our second quarter 2019 revenue. The sequential quarterly revenue increase reflected improved sales of products for wearable applications and a seasonal increase in certain legacy consumer markets. 2nd quarter 2019 industrial revenue of $22,400,000 increased 5.2 percent from the first quarter of 2019, due primarily to increased revenue for smart meters and point of sale systems. Industrial represented 14.9% of our total second quarter 2019 revenue. 2nd quarter automotive revenue of $21,200,000 grew 3.5% over the first quarter of 2019. Similar to computing, revenue growth in automotive was lower than we had anticipated 3 quarters earlier due to a slowdown in the broader market and like computing. Our superior technology and design activities both in standards and custom products have been widely accepted by Tier 1 customers. The range of applications, MPS encompasses includes infotainment, smart lighting, ADOS, and autonomous driving. Again, we believe MPS is well positioned to accelerate growth in automotive when the market returns. Automotive was 14.1 percent of MPS's total second quarter 2019 revenue. 2nd quarter 2019 communications revenue of $22,000,000 was essentially flat with first quarter of 2019. Sales for our legacy router and wireless applications decreased sequentially while sales, while infrastructure sales, including 5G network, increased. As 5G spending ramps, MPS is well positioned to benefit as existing design wins move to revenue. Communication sales represented 14.5% of our total second quarter 2019 revenue. GAAP gross margin was 55.1 percent 10 basis points lower than the first quarter of 2019 40 basis points lower than the second quarter of 2018 Our GAAP operating income was $20,100,000 compared to $21,700,000 reported in the first quarter of 2019, and $24,900,000 reported in the second quarter of 2018. Non GAAP gross margin the second quarter of 2019 was 55.6 percent matching the gross margin reported in the first quarter of 2019, but 40 basis points lower than the second quarter from a year ago. Our non GAAP operating income was $43,700,000 compared to $39,600,000 reported in the prior quarter and $41,400,000 reported in the second quarter of 2018. Let's review our operating expenses Our GAAP operating expenses were $3,000,000 2019 operating expenses were $40,300,000, up from the $39,000,000 we spent in the first quarter of 20 19 and up from the $36,900,000 reported in the second quarter of 2018. The difference between non GAAP operating expenses and GAAP operating expenses for the quarters discussed here, our stock compensation expense an income or loss on an unfunded deferred compensation plan. For the second quarter of 2019, stock compensation expense, including approximately $22,700,000 compared with $16,000,000 recorded in the first quarter of 2019. Switching to the bottom line. 2nd quarter 2019 GAAP net income was $20,700,000 or $0.45 per fully diluted share compared with $26,200,000 or $0.58 per share in the first quarter of 2019, and $24,200,000 or $0.55 per share in the second quarter of 2018. Q2 non GAAP net income was $41,900,000 or $0.92 per fully diluted share, compared with 37 $0,000,000 or $0.90 per share in the second quarter of 2018. Fully diluted shares outstanding at the end of q22 2019 were $45,500,000. Now let's look at the balance sheet. Cash, cash equivalents and investments were $369,700,000 at the end of the second quarter of 2019 compared to $362,300,000 at the end of first quarter of 2019. For the quarter MPS generated operating cash flow of about $44,100,000 compared with Q1 2019 operating cash flow of $38,800,000. 2nd quarter 2019 capital spending totaled $19,300,000. Accounts receivable ended the 2nd quarter of 2019 $55,400,000, representing 33 days of sales outstanding, which was 5 days lower than the 38 days reported at the end of the first quarter of 2019 2 days lower than 35 days at the second quarter 2018. Our internal inventories at the end of the second quarter of 2019 were $143,600,000 up from the $142,500,000 at the end of the first quarter of 2019. Days of inventory of 193 days at the end of second quarter of 2019 were 12 days lower than at the end of the first quarter of 2019. As we have said in the past, we are comfortable carrying a higher than normal level of inventory during a downturn given that most of our products are not customer application specific and carry minimal obsolescence risk. Having said that, do not expect meaningful reductions 2019. I would now like to turn to our outlook for the third quarter of 2019. We are forecasting Q3 revenue in the range of $162,000,000 to $168,000,000, We also expect the following: GAAP gross margin in the range of 54.9% to 55.5% Non GAAP gross margin in the range of 55.3percentto55.9percent Total stock based compensation expense of $18,300,000 dollars that we $100,000 $61,100,000. Non GAAP R and D and SG and A expenses to be in the range of 39 in our new 55 nanometer process technology on 12 inches wafers and are selectively adding headcount despite slower revenue litigation expense should range between $400,000 to $600,000. Interest income is expected to range between 1,400,000 be in the range For the remainder of 2019, we remain cautious amidst the market uncertainty I believe MPS is well positioned for long term growth. I will now open the phone lines for questions. Thank Our first question comes from Rick Schafer from Oppenheimer. Please go ahead. Hi, congratulations guys on results and I know it's not easy to do in this environment. So maybe my first question is if you could just give some more color, maybe parse out the areas of relative strengths heading into 3Q, sort of which segments I just had a high level which segments you expect to grow and maybe which segments might be lagging a little bit. Thanks, Rick. They are kind of all lagging a little bit now. Well, if you look, sequentially, Automotive is expected to, probably contribute, both in terms of dollar and also percentage gains Likewise, I'd say that industrial, which can be rather lumpy business, should show some improvement from Q2 to Q3. Again, when you look at the comparison against last year's Q3, to Michael's point, exactly. Consumer usually is the bellwether. And in fact, that, that has remained down from last year. And, industrial would be sort of flattish, but we do expect to see continued improvements in both automotive and communication year over year. And maybe on that topic, Michael or Bernie, maybe just a little color on what's happening with China auto, if there's doesn't sound like it, but if there, I mean, I guess you did mention auto is picking up a little, so it is China specifically is are you seeing signs of pickup there? And maybe as part of your answer on auto, I'm curious just if you could talk about some of the design you guys have there with auto OEMs, Tier 1s, sort of how the pipeline is stacking up through all this downturn. I assume there's still a fair amount of design activity going on? Yeah, my, I'm, our auto is that goes up slightly. I don't know this is from us and more. This is from a noise or just on a certain project where we're still a very small in the entire auto auto segment, our market share is very small. And, in terms of of, engagements and the designing activities. And, we actually surprised ourselves. And, okay, that we qualify from the, from 1st tier suppliers and including OEM. And, at the level of engagement and the level of meetings that they requested. And look, it cannot be better. And just as a finishing point there, I think that the results that we saw in the first half of the year were colored mostly by the soft demand, particularly in the China market. And then the uptick that we expect to see in the second half of the year as a result of the, new model year is being rolled out, particularly in, North America, Europe, and Korea. Thanks. And then just a quick housekeeping question, if I can sneak it in. Just on your Huawei exposure, I know it's small for you guys. I think I think you've said low single digits. I mean, some companies have talked about being able to ship, that that there's not a basically everything that because they're non national security, sort of can you give some color on what you're able to shift to Huawei sort of how much of that low single digit exposure are you able to actually to ship out to them? Thanks. Sure. There's a couple of points there. I mean, obviously in the middle of May, that's when the Department of Commerce added Huawei to the entity list. And so, like our peer companies, we didn't have of how the ban would affect us and how to implement it. And after we completed that review, we concluded that MPSICs are really not subject to the entity list prohibitions. We basically determined that certain components were deemed compliant within the sales band framework. And so we have resumed shipping One thing to add is that, historically, Huawei has been a very small percentage of our business, and I'm not talking to them in total here, but I am saying that, in in particular with the level of uncertainty related to tariff and trade, that we did see a step up in volumes, in Q2, as, certain customers built inventories in advance of any further bans. We are not not depending on Huawei to growth. Thank you. Our next question comes from William Stein from SunTrust. Please go ahead. Great. Thanks for taking my questions. Normally, downturns in my experience tend to trigger an increased pace of innovation, customers sometimes look to use the weak demand environment to sort of leapfrog competitors. And I'm wondering if you're seeing this trend now and how it affects your view to your future revenue growth? Yes. Will, I think that is a very accurate observation, and particularly when we look at areas that really are exciting for our future, in particular within computing, we've talked about cloud based server and, AI, even storage, which has been down now for about three to four quarters. We're seeing a very high level of engagement. And the same can be held true for automotive in particular. And a point that Michael made earlier that I do want to emphasize is that, in the past, we've had to go out and really get them excited at MPS. And now that engagement is starting to occur where they're calling us and setting up meetings at the executive level. So, we're not gonna try and, tell you the timing of when the market's gonna turnaround that from a theme for this quarter, we really believe that we're well positioned to take advantage of it. Maybe one more if I can squeeze it in. The Q3 guide is remarkably in line with consensus, but I think at least by my analysis, it looks slightly above typical seasonality. So still not as robust year over year growth as we've come to expect from monolithic, but But looking like maybe we're passing through the bottom in terms of year over year growth, when we think about Q4, while you're not guiding it, I think normal seasonality is up mid to high singles. Any reason to think that would be better or worse than typical? I think Q4 usually is we are slightly lower and it's not up to a single digit. Okay. And, in the last few years, in the last 2 or 3 years, the seasonalities, and we are we don't know what's our seasonality. When you grow 'sixteen, 'seventeen, twenty some percent, twenty some percent And, so the seasonality is not very clear to us. But the Q4 think as we are either flat or slightly down, so I mean, I don't know what the I forgot the last year number, maybe slightly up. Well, the last year was down, so again. Last year was down year before. We were actually up, and that was after, we started to get traction in the server business. Yeah. And we were actually continuing the theme, Will, that, in both Q1 and Q2, However, you define sort of our historic norms, we're underperforming in Q3 by about 2 3 percentage points. But I think that, Michael's point is spot on that, we've had a lot of volatility in the last 2 years as we've had to change in sales mix. So it's not as predictive, as it once was, but I do feel good to add your point that, we've basically stayed in a good position relative to expectations for the quarter. Well, more things are given. I very much agree with you, Usen, okay, this year's and we can, we don't have a clear views on how the industrial growth. And only we can do this, is do our best effort to have a design win and to engage with our customer close Thank you. Our next question comes from Tore Svanberg from Stifel Nicolaus. Please go ahead. Yes, thank you and congratulations on the results in this environment. First question, the consumer revenue, the urea declines continue to improve. And as we look at to the September quarter, should we expect that to continue. So again, I'm not asking for that to be up to anything, but it does seem like the year over year declines are certainly moderating each quarter here. Tore, thank you very much for your earlier compliment. Yeah, the, consumer is a little bit hard to, handicap. I think that you're aware that, We parse it into 3 general groups, high value, gaming and traditional or legacy. And, historically, I think that legacy has had a certain seasonality that was relatively, predictable But even that's gone out the window, as we've seen a softening in demand, more clearly in Asia, China, but not exclusively there. And actually the high value, which has a lot of exposure to home appliances, actually has rebounded nicely and is continuing strong. And I think you're also aware that, as we start to go into the holiday season that gaming is going to pick up. So, it's not clear that I would be cautious in using any term like bottomed out or that it's more that we have a different, slightly different mix within those three buckets. That's very helpful. And as we start to look at your design activity, sounds like you're getting a lot of traction with, what we've referred to as the high end processors. These are AI engines anything in Sugar or maybe even in 5G equipment. Could you elaborate a little bit on that and should we start to see some revenues already from those high end processors this year or is this more of a 2020 growth story? Yes, I think those are to the extent that, they're commercially available, they're very early stage. And, we don't have enough momentum to clearly identify a trend line. As we said that, take 5G, for example, we're very well positioned with our technology on any number of different platforms with any number of different technology and, what our point of entry is, gives us a lot of, confidence that we'll do well but again, it's going to take time for that market to develop. I think initially that and some of the other high end theme, which you can include, AI, in, are going to start out a little bit lumpy before a true ramp becomes parent. That's great. Just one last question. You mentioned 15.5 nanometer on 12 inches. I assume you're not getting any benefit from that yet, probably more 2020. But would that be more of an enhanced to gross margin? Or will you use that, cost of node to basically continue to accelerate the growth? Yes. I don't know if this is 15, 5 nanometer. Is that accurate enough, okay? Yes, we do use 2, we do use a 12 inch, and we're starting a 2, 2, 12 inch wafers. And, and, those are, as you said, these are user, we always use a trading edge of a, of a Advanced, like a Advanced Equipment. And, when were those, when were those, these equipment available, then we're moving in. And, those are when we started development, always about 2 or 3 years or like, 2 or 3 years later, that will benefit our cost and also the, features that we can offer to our customers. And I think an example of that is if you look at how our 5th generation rolled out we're now getting the benefits of that, even though that, that has been in the market for the last three and a half, four years. Sounds good. Thank you, Bernie. Thank you. Our next question comes from Alessandra Vecchi from William Blair. Please go ahead. Hey, congratulations on the good quarter. Just a quick question on the gross margins. It's not a surprise that they've sort of been trending flat over the last few quarters. But if we look out into next year, what do you sort of need to see happen to resume that 20 basis points of sequential improvement? Is it really, is it a mixed situation or is it predominantly an in demand situation? The one begets the other. So we need to see an increased ramp in overall demand, but really if you look at each of the last, 4 or 5 quarters, we've actually seen sequential decreases in the sales mix. Yes, we would build our productions in the fall, much higher capacities. And now we see the growth are slower. So that is partially also impacted in the in the gross margins. No, that makes perfect sense. And then just expand on Tore's comment or question with regards to some of the strong first half design wins ramping in the second half. Or starting to trickle in, I should say. On the AI front there, are you predominantly talking about the 48 volt product or how should we think about how you play in AI on the processor front? Yes, we have a design wins, and we have a design win. And, 48 volts, it's, we believe is an inevitable solutions as a power it keeps going up. And so we started a few years ago, we developed that kind of a solutions. And it's kind of a widely accepted. And we expect to have a revenue to ramp now. And but then, we don't know, customers push the ramp in the near future and in the next couple of quarters. Thanks Alex. Thank you. Our next question comes from David Williams from Loop Capital. Please go ahead. Hey, thanks so much and congratulations on navigating this tough environment. First, I guess I wanted to see if kind of talk maybe about your channel inventories and how you're feeling about that. It sounds like maybe some of the appliance over inventory has been digest a bit, but throughout your other markets, how do you, I guess, do you get a sense on how your inventory levels are there and just kind of how you expect those to trend over quarter or 2. Yes. And again, I just want to clarify. You said channel inventories? Yes. Yes. So, I think at the end of Q1, we acknowledge that we were above our normal range for channel inventory. Some of that had to do with, sort of a backend loading, of the quarter where sales that we made in the last month of the quarter did not go out to the final end customer. In Q2, we had much more balanced sales on our side, by month, and the channel responded and actually, particularly in China and Taiwan, we've seen a, a significant reduction. We're back down within our, sort of comfort zone with the channel inventories, it's a little bit hard to, call out by necessarily end market application. It's easier. We have greater visibility as relates to geography. Great, great. Thanks. And then Bernie, you had noted prior that you thought that you could maintain revenue growth. It was 10% to 15% above what the industry was averaging. Do you still feel comfortable with that? And just kind of looking at where you are this year, do you think you can do better? Or how do you, I guess, is that still a good stick to measure by? Well, as I said earlier, negative. This is a kind of uncertain market now. And, and, our cut that will not give us a very clear feedback. So that's a, we these are our our controls, we what we do the best is they have a product designed. And And, one way or the other, they will turn into a revenue. Yes. And just to agree with Michael's point there is that it's just very difficult for us to project further than 1 quarter out. And, there's sort of an interesting, we have the, elements of the business that are within our control, and then we have other elements that aren't, necessarily directly within our control, And to the extent that, we can continue to secure design wins and get customer engagement, I'd say that, we're doing a very good job, both in execution within the quarter, but also as far as securing our longer term future. Yes, we're doing a good job because we ignored all the micro, okay, total macroeconomy. And we do we can do the best. We where we can control it. Sure. Okay, great. And then one last one for me, if you don't mind. Just kind of look at the computing and storage How are you seeing, I guess, the demand for the hyperscale data centers? And I guess if you're thinking about that segment in particular, Where do you think you see the greatest degree of demand today and how do you think that plays out to the rest of the year? I think that, I can acknowledge that, somewhere about Q4 and certainly in Q1 and for a portion of too, that, we saw a dip in demand by hyperscale, we believe based only on our experience that it was broad based. It was not just related to an individual, company. However, if you look particularly at the long term demand forecast for e Commerce, eventually, we believe that a lot of this has to do with, just absorbing, excess capacity or inventory that had built on their shelves. And that the, demand for e commerce based solutions is going to expand and there will have to be, renewed investment I don't know exactly when that's going to start to pick up. And it might be, not even across the board. For example, we might see a little bit more few quarters, it'll return to, building momentum again. Great. Thanks for all the color and good luck on the quarter. Thank you. Thank you. Our next question comes from Quinn Bolton from Needham. Please go ahead. Hey guys, this is Michelle on for Quinn. Thanks for taking the question. So I guess the first one is consensus estimates for 2020 as far as like revenues growth? It looks like the street has you at 19% So given the macro uncertainties going on, just wondering if you could just discuss the revenue growth drivers in 2020. What would be driving towards? Yes. So let me restate the question. If you don't mind, you had 2 there. The one is that currently the street has us growing at just under 19% for 2020, And within that, what growth drivers do we believe are, Is that correct? I don't know, it's 19% now? So I think we kind of committed and that we can grow that in, better than the industrial in industry average by 10% to 15%. That's what we're committing. And, And even that, Nakam, I look at our history, that's what we have done in the in the past. And this year, I think it's the same as this year as kind of as a it's not very certain. And we'll look back same as like 2012 2000 and 2008, okay. And those are very, certain years, and that's what we and that's what we have, what we achieved. Yes. And I think that as far as the growth drivers again, Michael is right is there's too much uncertainty to sort of affirm or even not say that, we can't live up to the expectations. But I think you're going to see, continue to increase demand for our products, particularly in, computing automotive And we're also going to see, the initial uptick in the communications markets. Okay. That's helpful. Thanks. And then one just on the project delays, I think you guys kind of touched on it, but I was just wondering if there's an update as far as if you've seen an increase in any delays or how the delays you saw, since our first quarter call? Have changed over the past quarter? Yes, we don't it's a difficult. Some of big project delays, some project small project advance. So we the weight of each project, we don't have a very, very clear accounting method of accountings. And, the companies in a way of migrating, we become, like, 3, 4000 products. And we have, again, at the every any given time, we have a few thousand projects going on. And so we don't, we don't know. Okay. And just one clarification. For 3Q, computing and storage, did you say what was the trend that you said for that end market? Yes. So overall, we see a delay, a delay of launch and a delay of projects and agree, and we see overall slowing down. In, starting from earlier this year's and even now the similar conditions? Okay. And one thing to add there is the second half of twenty eighteen, actually we did very well with computing and storage. So we're going into a situation where we see some, some signs of improving, momentum, but we have more difficult comps in the second half of the year. That's all for me. Thanks guys. Thank you. Our next question comes from Matt Ramsay from Cowen. Please go ahead. Hey guys, this is Josh Buckhalter on behalf of Matt. Let me echo my congrats on some solid results in a tough backdrop. I guess I wanted to circle back to industrial. It took a step down compared to last year, but it's still growing solid double digits in a notably weak environment. It's fragmented, but are there any verticals in particular that you would like to call out that are help insulating you here? I think that, if you're looking at sort of sequential growth, I think we, called out the fact that, smart meters and point of sale systems, picked up to a degree that, frankly, we hadn't fully paid it. And, when you look at the year over year comparisons, remember, our industrial tends be a little more fragmented. We've got like 4 verticals that we depend on. And in fact, power sources and, security, in addition to smart meters, seem to be continuing with good momentum right now. I think that Bernie said that our industrial market fragment, our entire company is a fragmented. And the beauty is, okay, and one segment is a slower down. Other one second was a, it will pick up. And so nothing's more than a bigger percentage of total revenues. And where we look at overall NPS will grow this year. And, we'll now grow the same pace as the last year, we cannot see it. Understood. And I appreciate the color. And then as I follow-up think it's been a couple of quarters, but I was hoping maybe you could provide an update on e commerce and e motion, if there's anything to share there? Thank you. Still very early stage. We try to figure out why people don't why people us have a good solution, but nobody buys it, okay. And, at least not selling the hotcakes. And, we are still in the midst of figuring out, you know, why in the house, and, okay, we can, but we committed And as long as the people say, our customer said, there's good solutions and, we will keep figuring out. But overall, revenues and also, design customer request, it's I don't have a clear numbers that and, but increase is a tremendous slate. And, we have difficulty to handle that. And, that's a very, very good encouragement And, once we feel the, we have a handle on it, we will give you a revenue commitment. And again, most of the comment is related to the e commerce platforms, Actually in e motion, we're seeing very good engagement, this year with, products that are beginning to ramp in revenue, and there paid it even as recent as 2 years ago. But, I think that, that is holding up, 2 expectations for the current year. And also, as we look ahead to the next year or 2. Thank I show no further questions in the the queue at this time, I'd like to turn the call back to Bernie Blegen, Chief Financial Officer, for closing remarks. Great. I'd like to thank you all for joining us this conference call and look forward to talking to you again during our third quarter conference call, which would likely be at the end of October. Thank you, and have a nice day. Thank you. Ladies and gentlemen for attending today's conference. This concludes the program. You may all disconnect. Good day.