Earnings Call: Q2 2018

Jul 25, 2018

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. Later, we will conduct a question and answer session and instructions will follow at that time. As a reminder, today's conference is being recorded. I'd now like to introduce your host for today's conference, Mr. Bernie Bliggin, 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 Singh, 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 dollars, R and D and SG and 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 QT q22 2017, Q1 2018 and Q2 2018 releases. As well as to the reconciling tables cast 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. 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 $139,800,000 was 8.2% higher than revenue in the first quarter 2018 24.6% higher than the comparable quarter in 2017. MPS's sales momentum continues to build as we generate superior results from our R and D investments targeting the computing, automotive, and industrial markets. Looking at our revenue by market, in our computing and storage market, revenue of $37,000,000 increased $12,500,000 or 51.1 percent year over year. Growth in this market storage and high end notebooks increasing at a rate well above the market. Computing and storage revenue represented 26.4 percent of MPS's 2nd quarter 2018 revenue. 2nd quarter automotive revenue of $20,300,000 grew 58.2 percent over the same period of 2017. Fueled by product sales for infotainment, safety and connectivity application products. Automotive revenue was 14.6 percent of MPS's total second quarter 2018 revenue. In our consumer markets, revenue of $47,800,000 increased 8.9% over the second quarter of 2017 and represented 34.2 percent of our 2nd quarter 2018 revenue. The year over year revenue increase reflected gains in home appliances IoT related applications and specialty lighting. 2nd quarter2018in industrial revenue of $19,100,000 increased 27.2 increased sales of industrial power supplies. Industrial represented 13.7% of our total 2nd quarter 2018 revenue. GAAP gross margin was 55.5 percent, 10 basis points higher than the first quarter of 2018 80 basis points higher than the second quarter of 2017 Our GAAP operating income was $24,900,000 compared to $22,000,000 reported in the first quarter of 2018 and $15,000,000 reported in the second quarter of 2017. Non GAAP gross margin for the second quarter of 2018 was 56.0 percent, 10 basis points higher than the first quarter of 2018 40 Our non GAAP operating income was $41,400,000 compared to $37,200,000 reported in the prior quarter and $31,200,000 reported in the second quarter of 2017. Let's review our operating expenses. Our GAAP operating expenses were $52,700,000 in the second quarter of 2018 compared with $49,500,000 in the second quarter of 2018 $46,500,000 in the second quarter of 2017. Our non GAAP second quarter 2018 operating expenses were $36,900,000, up from the $35,000,000 we spent in the first quarter of 2018 and up from the $31,200,000 reported in the second quarter of 2017. The differences between non GAAP operating expenses and GAAP operating expenses for the quarters discussed here our 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 charged to cost of goods sold, was $15,900,000 compared with $15,000,000 recorded in the first quarter of 2018. Switching to the bottom line, Second quarter 2018 GAAP net income was $24,200,000 or $0.55 per fully diluted share, compared with $21,900,000 or $0.49 per share in the first quarter of 2018 and $15,000,000 or $0.35 per share in the second quarter of 2017. Q2 non GAAP net income was $40,000,000 or $0.90 per fully diluted share compared with $35,000,000 or $0.79 per share in the of 2017. Fully diluted shares outstanding at the end of Q2 2018 were 44 point $4,000,000. Now let's look at the balance sheet. Cash, cash equivalents and investments were $318,700,000 at the end of the second quarter of 2018 compared to $312,500,000 at the end of $400,000 compared with Q1 2018 operating cash flow of $16,300,000. 2nd quarter 2018 capital spending to $5,600,000. Accounts receivable ended the second quarter of 2018 at $53,500,000, representing 35 days sales outstanding, which was 1 day higher than the 34 days reported both at the end of the first quarter of 2018. And at the end of the second quarter, 2017. Our internal inventories at the end of the second quarter of 2018 were $128,900,000 up from the $111,900,000 in the first quarter of 2018 days of inventory increased to 189 days the end of Q2 2018 from 177 days at the end of the first quarter of 2018. The increase in inventory days is due to a buildup 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 twenty eighteen. I would now like to turn to our outlook for the third quarter of 2018. We are forecasting Q3 revenue in the range of $155,500,000 to $161,500,000 We are also expecting we also expect the following: GAAP gross margin in the range of 55.2 percent to 50 6.2%, non GAAP gross margin in the range of 55.6 percent to 56.6 percent. Total stock based compensation expense of $15,000,000 to $17,000,000, including approximately 500 $1000 that will be charged cost of goods sold. GAAP, R&D And SG And A Expenses between $52,300,000 $57,300,000. Non GAAP R and D and SG and A expenses to be in the range of 37,800,000 2 to 3 years, we are stepping up investment in our foundry capabilities. We are actively qualifying 2 12 inches fabs and are in the process of developing advanced technologies. Expected to be in the range from $600,000 to $1,000,000 before foreign exchange gains and losses. Fully diluted shares to be in the range of 44,000,000 to 45,000,000 shares before share buyback. We are continuing to execute our long term business strategy, which we believe will maximize long term shareholder value. I will now open the phone lines for questions. Our first question comes from the line of Ross Seymore with Deutsche Bank. Your line is now open. Hi, this is Ariel on behalf of Ross. Thanks for letting us ask a question on solid results guide. 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 comps and industrial. At the Analyst Day, you guys detailed that you could see auto growing at a 40% to 50% CAGR. Auto grew about a 60% to 65 cAGR from 2013 to 2017. Is it fair to think of auto growing like about a maybe 40% CAGR going forward through 20 I guess, how do you guys think about the growth going forward? Sure. At the Analyst Day, it was on June 7th, We characterize growth for the next 3 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% 60%. So I think that you're in the right ballpark in, for your CAGR. All right. I appreciate that. And, Nick, I'd like to ask about the inventory dynamic that you guys had this quarter. I understand you guys had some prepared remarks, but I'd love to hear you guys little bit more on it. So inventory is up 39% year on year. Your guys are that's ahead of revenues for actually the 6th straight quarter. Maybe there's some mix dynamic there. I understand with auto, maybe some of your parts have a longer lifecycle and maybe require more of a build. But is there anything else that you'd like to elaborate why inventories continue to be outgrowing revenues? Actually, you gave a pretty complete answer for me there. In that we're experiencing Bernie already said it in earnings, right? One of us 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 to see any hiccup, either the number of the product or the quality issues. And we don't have any history of it. And that's where to be very cautious, we use the cash wisely and We never intend to do in the NPS in the history. We don't write a lot of a lot of inventory. And so if you want to talk about our inventory, okay, this is how we manage it. Okay. And We have a long life cycles, okay. And as long as we see it grow 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 And Company. Your line is now open. Congratulations on the nice results for June and the particularly strong guide for September. Just wanted to start with the September quarter. Is there anything particular, any one end market where you're seeing particular strength leading to that guide or is it pretty broad based And then I've got a couple of follow ups. It's a pretty much a broad base. Okay, all the growth areas that we covered in the last few quarters, the story remains same. We are very with the very beginning. And, all the products we're ramping is across the board. You guys still feel pretty comfortable with hitting that 8% to 10% share of the server power management market by, or 4 of 2018? Yeah, our expectations for the server market have really have not changed in the 18 months since we started discussing it in those terms, we're seeing very positive results and very good acceptance and continuation of good volume. Great. And then just wanted to ask, some others in the industry been constrained by the supply of ceramic capacitors and passive devices. And just wondering if you're seeing those same constraints, if so, are you doing anything to try to avoid some of those constraints possibly purchasing passive devices that you can sell as part of your solution to the customers or any thoughts on the supply of passes and whether it's impacting your business? Yes, it does impact our business. And, a lot of our product I'm ramping, I just, not as high as we expected. And we are looking, heavily as a design around without using the capacitors. Okay. And then last for you, Bernie, you mentioned the step up in spending here to qualify 2 12 inches foundries. Sounds like that that might be a 2 to 3 year phenomena. Is that does that take you above the OpEx as a percent of sales in that range of to 60% or do you still think you can kind of target that 50% to 60% OpEx growth as a percent of revenue growth? Yeah, 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 2 fabs, we will be beyond what our model is. But we're very conscious of the need to get operating leverage and turn spending down to the 50 percent to 60 percent of revenue growth. But I would say that probably for the next 4 to 5 quarters, maybe as long as 6. We'll probably be above that level. Okay, great. Thank you. The next question comes from the line of Rick Schafer with Oppenheimer. Line is now open. Thanks. You guys and congrats on a nice quarter. Guess maybe I'll start off with the e commerce question. Maybe an update on the progress there with that effort. I know you're already adding some customers. So just curious what feedback has been and maybe if you could quantify what that opportunity looks like for you guys over the next couple of years or put some kind of I know that's tough, but put some kind of quantify it somehow, I guess, give us a TAM, kind of what you how you guys look at that. Well, okay, I can't answer you the first question first. The website is up. And It still looks pretty shitty, but we'll improve it later, okay? And, we do have orders come from our own website. And the programmable modules that we're pushing out there and this is a trajectory. It can be and because this is a form of nothing to something. And, we look at the numbers and in the last couple of months is better than I expected. And, so we'll keep evaluating. So stay tuned. Okay. But for now, I assume you're we're keeping it out of the model for now, I guess. Yes, we keep out of the model. We've kept revenue expectations made a conscious effort to keep them low for 2018 2019. And really what we're trying to do is get up to speed on what takes to market and successfully manage the e commerce experience. And during this time, we'll also be adding more products and getting traction customer acceptance. Got it. And 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 that timing looks like of that, who you're likely to compete with there. I think GPU probably ramps before CPU. So maybe what has to happen for that to go? Yeah, we expected hitting the mainstream in the early or mid-twenty 19. And we've been looking at, we've been developing that product for, in the last 3 years, and we see this imminent and solutions for the future servers. And I can't answer, I mean, who do we compete with because there's no such a solution out there. And maybe there's a few And our solution will be, will be hit, mass produced and easy to use. And, we see, and then 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 3 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 when 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 come? 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. Some of the and, I don't know, it's is the first shipment or we suddenly will start assembling it. Okay. Thanks. Slightly different development tracks where the 55 effort will probably have design wins early in 2019 the 300 millimeter will probably be more out in the 2020. Great. Thanks. 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 sort of the the variability and 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. Yeah, I think that as we said on the call that there's really 3 or 4 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 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 really could be any one of the opportunities in computing and storage or automotive in particular. Where we could experience a pop. Thanks Bernie. 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 the same emojis products and a lot of them I see. We're rather selling the ICs and it was selling the total solutions. And it's a lot better way, a lot easier way and, to to generating revenues or to service our customers that we learned from Ireland from the last couple of years. And so I see this is the same kind of limping to the same kind of things. And on the emotion, that is starting to ramp very nicely right now. And we've seen a lot of design wins that we have not just in 'eighteen and 'nineteen, but even 'twenty and 'twenty one that we're already going to be benefiting from. So that is a initiative that we started in earnest about 4 years ago and that's about 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. Thank you, Will. Your next question comes from Tore Svanberg with Stifel. Your line is now open. Yeah, thank you. Congratulations on hitting all these records. First question, the 12 inches fabs, I understand the OpEx element 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. Yeah, Tore, okay, you covered us for a long time. And you know that our pattern is that we've moved from an early days ago 60 inches and then we go 8 inches. The 8 inches was the first 8 inches was a point 35 micron fabs and now And we work and wait until these are these are, 180 nanometer fabs and depreciated it further, then we move there. So, okay, so each step we move to new foundries or new more advanced fab that it doesn't impact the margin immediately. And so those 12 inches fabs are still expensive, okay. But 3, 4 years later, that will be cheaper. And so we just follows our history. We repeat and repeat the same thing. And by the time we have a superior technologies and a good cost. Very good. And I believe last quarter, your ASPs were up sort of in the high single digits. Is there a number you could share with us for this quarter? Not at this point. What I can tell you is that the ASP Delta It 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 an upward bias as the a higher percent of our business is with these newer opportunities. Very good. And just last question on automotive. It's like there could be some pretty major upside there next in the second half of the year. If we think about the concept you have in the car so far, I think primarily in lighting and also in some of the maybe USB power stuff like that. Is there some new incremental content in other areas that could come over in the second half of this year? Actually, as far as the technology that we've introduced into automotive, It really is centered around the infotainment, the USB dash 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 ramp and the body controls and then a little bit after that in lighting. Great. Thank you. And again, very impressive quarter. Thank you. Our next question comes from the line of Alex Becky with William Blair. Your line is now open. Congratulations guys on the good quarter. I guess just moving back to the increased expenses on fabs. Bernie, you said that would go on 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 had 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're starting to see the those investments translate into the P and L here. But the overall commitment to manage our core business outside of, you know, I'm not going to describe these as one time costs necessarily, but you know, 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. Well, here, we see the opportunity to grow and we want to we will grow in the next 2, 3 years. And And we have a lot of opportunities. And so we made a decision so that we're going to increase it. And to increase our expenditures and investments rather to in a new fab. So that we don't have a we don't we won't have a capacity issues. And at the same time, I will keep keep our technology advance forward. And just look at last year and this is early this year. NPS 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 top line and and the EPS. I'll care the rest of us 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're 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 we'll be above it, sometimes we'll be lower. And then the thing to focus on is we only provide guidance, 1 quarter ahead of the time. To be fair, if we grow less, okay, we'll spend less. And now this is where we're accelerating our growth. We cannot grow in the same year. Understood. 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 you don't guide Q4, but given some of the upside opportunities you guys have been describing, how should we sort of think it 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 seasonality the way we've been historically. Now having said that, Q1 came in higher. There was lower step down from Q4 to Q1 than we'd 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. Yeah, our seasonality has changed. And last year, as business changed. And also we are in a higher growth period. And so the last year, we have a 4 consecutive I think is it right? Yes. 4 consecutive growth, okay, it never happened. And, and never happened since 2000 4, 2005. And so I can't tell you what's our seasonality anymore. Okay. Our next question comes from the line of Matt Ramsay with Cowen. Your line is now open. Hi, this is Josh Pokalter 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 of the moving parts within the quarter and maybe the guide given your large socket wins there? It's 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 technologies 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 to how we expected it. And right now, we don't see any headwinds. In fact, this continuation of tailwinds. Understood. Thank you. And then you provided an update on e motion and e commerce hoping maybe you could provide the same on field programmability? No, this is tied together. The e commerce, of course, is the wider that we do. Some of the products is not programmable. And Currently, I think that we sell most of our products, then it's kind of fixed. And because the website was late and then now we have the capability to reprogram them. Product, reconfigure the product. So these are the same to me, okay, e commerce and 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 catalog today and reengineer it around field programmability, which offers the our customers the best ease of use and time to market. Got it. Thank you and congratulations again. Thanks. Thank you. 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. 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.