Earnings Call: Q1 2018

Apr 30, 2018

Good day, ladies and gentlemen, and welcome to the Monolithic Power Systems, Inc. Q1 2018 Earnings Conference Call. At this time, all participants are in a listen only As a reminder, this conference is being recorded. I would now like to introduce your host for today's conference, Bernie Leggen, Chief Financial Officer. You may begin. Great. Thank you. Good afternoon, and welcome to the First 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 the company'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 Q1 earnings release and in our SEC filings, including our Form 10 K filed on March 1, 2018, which is accessible through our website, www. Monolithicpower.com. MPS assumes no obligation to update the information provided on today's call. We will be discussing gross margin, operating expense, R 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 should not be considered as a substitute for or superior to measures 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 2017, Q4 2017 and Q1 twenty eighteen 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 had yet another record first quarter with revenue of $129,200,000, 28.7 percent higher than the comparable quarter in 2017. MPS continues to benefit from our technology leadership and diversified multi market strategy Looking at our revenue by market. Compared with first quarter of 2017, revenue from consumer markets increased eleven point $5,000,000 or 32.4 percent. The year over year revenue increase reflected solid improvements in high value consumer markets, including home appliances, power chargers and lighting, as well as increases in certain traditional consumer revenue categories. Consumer revenue of $47,100,000 represented 36.5 percent of our Q1 revenue. In our computing and storage market, revenue of $31,000,000 increased or 50.2% year over year, reflecting strong sales growth for cloud computing, SSD storage, and high end notebooks. Computing and storage revenue represented 24.0 percent of MPS's 1st quarter 2018 revenue. First quarter 2018 automotive revenue of $17,700,000 grew 43.8 percent over the same period of 2017. Safety and connectivity application products. Automotive revenue represented 13.7% of MPS's first quarter 2018 revenue. 1st quarter 2018 industrial revenue of 17 point $6,000,000 increased 14.3 percent from the first quarter of 2017, reflecting gains in smart meters, security and power sources. Industrial revenue accounted for 13.6 percent of our total first quarter revenue. In Q1, MPS adopted the revenue recognition standard generally referred to as Topic 606. Its adoption had a negligible impact on Q1 revenue. GAAP gross margin was 55.4 percent, 40 basis points higher than the fourth quarter of 2017 and 80 basis points higher than the first quarter of 2017. Our GAAP operating income was $22,000,000, compared to $13.6 For the first quarter of 2018, non higher than the fourth quarter of 2017 40 basis points higher than the first quarter of 2017. Our non GAAP operating income was $37,200,000 compared to $26,500,000 reported in the first were 49.5 2017. Our non GAAP first quarter 2018 operating expenses were $35,000,000, up from the $29,200,000 reported in differences between non GAAP operating expenses and GAAP operating expenses for the quarters discussed here are stock compensation expense and income or loss on an unfunded deferred compensation plan. For the first quarter of 2018, total stock compensation expense including approximately $433,000 charged to cost of goods sold was $15,000,000 compared with $11,700,000 recorded in the first quarter of 2017. Switching to the bottom line first quarter 2018 GAAP net income was $21,900,000 or $0.49 per fully diluted share, compared with $0.33 per share in the first quarter of 2017. First quarter 2018 non GAAP net income was $35,000,000 or $0.79 per fully diluted share compared with $0.58 per share team. Now let's look at the balance sheet. Cash, cash equivalents and investments were $312,500,000 at the end of the first quarter of 2018 compared to $304,300,000 at the end of fourth quarter of 2017. For the quarter, MPS generated operating cash flow of about $16,300,000 compared with operating cash flow 2018 capital spending totaled $7,400,000. Accounts receivable ended the first quarter of 2018 at 48 point $2,000,000 or 34 days of sales outstanding, which was 1 day lower than the 35 days posted in the first quarter of 2017. Our internal inventories at the end of first quarter of 2018 were $111,900,000 up from the $99,300,000 at the end of the fourth quarter of 2017. Inventories increased in anticipation of sales growth during the second half of twenty eighteen, especially for Days of inventory increased to 177 days at the end of Q1 2018 compared with 157 days the end of the first quarter of 2017. I would now like to turn to our outlook the second quarter of 2018. We are forecasting Q2 revenue in the range of $135,000,000 to $141,000,000. We also expect the following GAAP gross margin in the range of 54.9% to 55.9%. Non GAAP gross margin in the range of 55.4 percent total stock based compensation expense of $15,200,000 to $17,200,000 including approximately $500,000 that would be charged to cost of goods sold. Litigation expenses ranging $300,000 to $500,000, GAAP, R and D and SG and A expenses between $48,400,000 and $53,400,000. Non GAAP R and D and SG and A expenses to be in the range of 33 point $7,000,000 to $36,700,000. Interest in other income is expected to range from $600,000 to $700,000 before foreign exchange gains or losses. Fully diluted shares to be in the range of We continue to grow and continue to enhance shareholder value. You. You. And our first question is from Quinn Bolton from Needham. Hi guys, nice results. Michael and Bernie wanted to start with the power management business specifically the Pearly cycle. Can you give us an update on when the QS mod solutions for CPU power begin to ramp, does that start this quarter? We saw we see it starting in the last couple of quarters and just slowly, there are these activities. Yes, now that we see a lot more Yeah. And I think that in addition to Furley, we've certainly increased the number of design wins that we have on this cycle with some of our other products, the point of load and the e fuse. And so as we look ahead, we'd see it continuing momentum growth Do you guys still think you're on track to pick up those 4 to 5 points of share that you had previously talked about? Yes. Well, we only, talk about results for the next quarter of forecast. We don't see anything that's changing that assumption. Okay. This is a very beginning at the very beginning late, early. For NPS or the opportunities still developing yet? Okay. And then the second question just kind of it looks like your inventories are up in anticipation of sort of higher second half sales, but think the last couple of quarters you've said that things in the supply chain are tight. You were worried about double ordering. I think that was particularly some that you're worried about heading into the fourth quarter. Can you just give us an update on your backlog coverage? Do you think you've seen? Have you been able to sort of shake out any potential access from the order books? Yes, I think that, it's prudent to be cautious as far as in purpreeting the ordering trends that we're seeing. In each of the last three quarters, the bookings and backlog going into the quarter have been running higher than they traditionally have. And so as a result of that, we wanted to, a, be able to, make sure that we have adequate inventory in order to be able to meet real demand. But by the same token, we're trying to manage, what we observe as far as inventory in the channel to make sure that that doesn't increase and come at the expensive future growth. So, when we looked at the channel inventory at the end of Q1, it was very consistent. In fact, it was down a few days, more than a year ago. Great. Thank you. Thank you. Our next question is from Rick Schafer from Oppenheimer. Your line is now open. Thanks. And excuse me, congrats on another nice quarter guys. So your auto business, maybe my first question Your auto business has been doubling annually, I guess, the last few years. I think it was up close to 50%. I think you highlighted, Bernie, in your remarks this past quarter. Can you talk about the growth expectation for 2018 as much as you much color as you can give there? And maybe provide some color on what's driving that growth? I mean, it seems like ADAS is becoming a bigger incremental driver. So as MYC kind of maybe favors ADAS going forward? Can you talk about what that does to maybe gross margin in that segment? Sure. When we look at the automotive right now, we are certainly benefiting from significant growth But still, we represent such a small portion of what the total available market is to us. So a lot of what we're seeing right now has been in the gains in infotainment. And then we've also seen some gains in body controls and also in certain of the networking applications. And we look forward to, opportunities in ADOS in particular, although I don't think that those will be of a material nature to us until, for another couple of years. Got it. Thanks. Second question, the 12 volt to 48 volt transition that's sort of already underway in auto, can you talk about that opportunity as it relates to GPU and CPU core hour. Is that something else that we should think about as being sort of a couple of years from now before it's really a growth driver? And And who do you expect to compete with there? Who do you see also going after the 48 volt market for CPU GPU? I think a 48 volts market is being inevitable. And as a CPU or G power increases. So that's the only way to get the current down to get the efficiency up. And The thing is that it's all well known our competitors and that they are publishing papers, but we have solutions now. And Michael, any key competitors you see there? I mean, would it be the sort of the TIs and the infinions of the world or who would it be do you think at 48 all? I don't think, I don't we don't have a real solution out there, other than existing 48 volts and, 48 volts, which is very expensive as far as I know, And, I think where are the first few companies, our first companies that have our own solution as a semiconductor clears. Got it. And then if I could sneak one last question in, just maybe a quick update on your 300 millimeter design efforts. And I don't know how to frame that. I mean, any expectation or are for 300 millimeter revenue contribution this year? Or is it more of a am I I'm asking a lot of follow-up questions? I mean, is it or is this more of a 2019, 2020 kind of thing. I think it's 2019, 2020 kind of thing. I don't rule out at the end of the year. We have some small volume productions happening. And Michael, is that targeting any particular like specific verticals or is it just kind of across your basket of verticals? Think it's across a basket of vertical now, we with a 12 inch and we we integrate a lot more features in there. And as we talk about a lot of programming capability, a lot of memories and along with the increase of a power density. And we'll be putting a power solution on in the NPS name, it's a monolithic power system. We're going to put a soft power power systems on a single chip. And 12 inches is widening our capability. Got it. Thanks guys. Our next question is is from William Stein from SunTrust. 3, in light of your inventory build in the quarter, I mean, you've been a rapid growth company for some time. You've accelerated the year over year growth in the last couple of quarters now, which is great. And inventories are increased should we expect that acceleration to continue and to see even higher year over year growth rates as we progress through the year? That's what the inventory build would imply. So if not, I'm hoping maybe we can reconcile it a little bit. Thank you. Yes, that's a good, good reading, okay. I mean, course, we're not saying, okay, we're accelerating more, but we certainly anticipated that, okay, if there's opportunity there. And for investors that sort of look at this outsized growth rate and recognize it's pretty unusual, pretty unique in semis. Can you help us maybe review the reasons that you're seeing the design wins maybe from a technology perspective or just from the design wins that you've won re that you can talk about that would exemplify why you're seeing such rapid growth? If we're talking about all the design wins, like, we can go for hours. And Frankly, I don't even know. I can't remember 3 or 4 things, like I mean, just in the truly a broad based growth. And then we're not using our standard product and using our configurable software we can we can go into many different, different fields. That's actually realities. Yes. And That's the beauty of it. I can't say which one has a more growth. And Now you're talking about server, talking about autos, and these are much a very high concentrated market segment that we can talk about. But a lot of others actually grow more than these areas. So I can't really talk about it in the, In fact, a lot of smaller customers using our solution that really excites me. That means, okay, we're pushing a margin even higher. And we provide the service. Our customers really want that, even though we have outrageous margins, So that's kind of the things I'm getting excited. Great. Thanks very much. Congrats on the great quarter. Thanks. Thank you. Our next question is from Ross Seymore from Deutsche Bank. Hi guys. Congrats on the quarter and guide. And the comments you said earlier, Bernie, about the inventory up because you saw opportunities in the second half you said in Computing Consumer And Automotive. Without going into specific customers and sockets, etcetera, can you just talk a little bit about the application into which you're putting those parts in the back half of the year? And just what sort of dollar content penetration market penetration? Just some numbers around those to give us a little more color to help investors feel comfortable at the inventory level? Sure. So when we look at a lot of the growth that we've begun we started to enjoy probably beginning in Q3 of 2017. We were basically introducing new products and new markets for new customers. And, the demands of these customers are significant, meaning that we didn't want to come out of the gate with our new release new product releases and not be able to staying the growth because of being constrained in any way. So I think you recall that last year, we invested in bringing up a 4th fab in order to aid capacity. So really this has been pretty consistent as far as an overarching, supply chain management philosophy to position us to be able to achieve, as Michael said, should the demand be there, this accelerated rate of revenue growth. And we believe that, we have actually targeted. So when we look at the inventory levels, they're, targeted in some of the highest growth revenue areas And right now, it's also in the quarter, pretty well evenly split between raw materials office and finished goods, meaning that, what we've done is have a very balanced approach to how we're making those investments. Yes, Ross, you don't have to worry about these inventories. And like I mean, we increased it and I know our invest our investors, some of the investors kind of sensitive. And I'm kind of irritated, okay. And we grow this much and we need real inventory to back up. And on top of it, all these products, a new product. If anything goes wrong, we have something to back it up. And also provides with some industrial, automotive, even computing company. They want inventory, they want to, okay, wear the new players and we guarantee they're supplied. So that's why we're doing it. And, so Last reason is I don't worry about inventory. Our product cycles last for 10 years And we never we don't have a problems until I have a huge write off. That is very helpful. My second question, and I'm going to try not to irritate you further if that one happened to this might be worse, but The guidance on an absolute dollar basis, the guidance is great. On year over year, the guidance is great. Sequentially, though, that's less growth than you guys I mean, they have to go back many, many, many years. Is there anything that's changing in the very near term, the bridge between now and the second half growth that's less than normal? Is there something that's changed just with the move to ASC 606 as far as the seasonality? Just trying to figure Or are you just being conservative like you tend to do over time for consistency's benefits? Just trying to figure out what went into the guidance in those regards. Sure. I can help out with this. So if you look at, generally speaking, we have fairly large or pronounced falloff in revenue between Q4 to Q1. And, that didn't occur So the base that we're starting out with in Q1 revenue is much higher than the seasonal norm would normally provide for. And some of that represented that we had some late deliveries in Q1 that aided our performance in the quarter, but then also creates issue with the comparable Q2 number. So I would say that we do have a profile to always be able to meet expectations and in fact, do a little bit better. And, there is a change in seasonality relative to what our historic norm has been with Q1. And none of that is related in any way to the 606 the new revenue recognition standard? Yes, I think Ross, you covered us since the IPO, right? And you see the seasonality change. And we from a consumer centric to broad based announcing, okay, And, last year, we see a 4 quarters consecutive growth. So that's the first time I think the first time ever. 2006. 2006. That was the last time. So this is the second time. And I think at this time is a really changed, in a form that all the business change. And that's less illustrative questions. Thank you. Our next question is from Tore Svanberg from Stifel. Your line is now open. Yes, thank you. And congratulations on the consistency. First question, could you update us on e commerce and your programmable products? Or is that business model starting to contribute to revenue yet? Or is that still more of a second half event? Well, I think our old e commerce website is up. And I think that's the that's only the first step. And regarding to revenue, no, okay. And But the business model and it's more, the more I visit customers be these are smaller customers. And the more I'm really excited. I think that this is a we were hitting an inflection point in some point sometimes this year or next year. As we provide a more now, now is the time to provide more content. What can we put on the website? How we serve all these time to very quick time to market product or underserved customers. And the business models are really really believe are more and more I believe are when I visit those smaller customers. And I see a lot more opportunity And now we have to deliver more content. We have the website. But although the programming portion is still not there yet, But as we as I talk about it, we hand them a floppy disc, they can program on their own now. That's really helpful. And on that same topic, as that business model starts to materialize, I mean, wouldn't that mean that inventory days will be higher anyway, just because these are programmable parts? I haven't really thought about this one. The problem will be because we have a 3rd party product and as our part of our our solutions, okay. And, so that probably will be a higher inventory in the futures. And sorry, part of the benefit of being able to go to the 12 inches wafer is that we can have a larger production runs and get better cost economics that certainly benefit this mass customization market. Okay, great. And I had a follow-up question on the 48 volt. So are you using the BCB HV process for that or is it something else? No, that's correct. And we have a very efficient solutions and I think there's a lot of people seen it and we're presenting a papers and we have a real we have a real product now. Okay. And these are the this product family is a very cost effective and I think as a 48 volts, we're really betting on it. That's the futures. Okay, very good. Just Just one last question. I know there's been some talks in the industry about, shortages, especially for rollaway first. Is that something that you're seeing? And have you secured, capacity there for your growth going forward? We don't have a shortage And we don't have a shortage in the last year, we expanded fab and this year, we expanded fab again. And And, we don't see shortages, okay, we don't, and, we have a lot of inventories and we don't have shortage issues. And, to other ones, I heard a lot of stories, okay, my, out there, I can't confirm It's a Sounds good. Yeah. Thank you. Our next question is from Chris Caso from Raymond James. Yes, thank you. Good evening. Just another question following on to the seasonality question. And is there anything in particular we should be thinking about seasonality with respect to individual segments embedded in the Q2 guidance was automotive and computing carrying much of the sequential growth Q1, does that continue into Q2, or do you see a bit more broad based revenue growth as you go into Q2? I can't give you, I can't give you something what I see it, okay. And what I believe, The business that we focus on a very long term and a very broad based And these are designing activities and have designing activities turning to a revenue takes about 3 or 4 years. And we see all these activities and we see all these activity turning into our revenues. And I think from now on, we will have a very consistent growth and that's really where we want to see it and study state. And the growth on the or maybe studies, they have a bad connotation. Somebody got to pick up, okay, we're slowing down. We're not, okay. And And so I think as a consistent is the is the key. In the former next couple of quarters. And we don't see much of a difference from see, I guess. Yes. No, I mean, one of the things that we work to do is, even though we're in a high growth relative to our industry, is we want to be predictable. And I don't think there's anything boring about that. Right. Well, as a follow on to that, given the, what appears to be strong industry conditions, strong revenue for you guys. To what extent are you able to be somewhat selective in the business that you take from a quarter to quarter basis? I'm sure that there's some margin discrepancies among some of the things that you sell, given the business conditions right now, are you able a little bit more selective in that business? And if so, what does that mean? One of the things that we benefited from as we seen this shift in our business mix is that there are longer lead times. And so as a result of that, we're able to have very consistent 10 to 20 basis points improvement in our gross margin quarter over quarter And what that allows us to do is find the mix that allows us to accelerate our rate of revenue growth. So it's really having that visibility and that lead time that allows us to be able to manage the business, in this manner. Great. If I just want one quick follow on, in computing, Intel made some changes to the roadmap on 10 nanometer pushing some of I know that you guys have had some design wins on that. Is any material effect on your business going forward? No. We manage, we keep an eye on what Intel is doing but, as far as the delay and a release sort of change in their roadmap, it does not, is not going to impact us. Great. Thank you. And our next question is from David Wong from Wells Fargo. Your line is now open. Thanks very much. Michael, can you run through some of the R and D projects currently underway that you're most excited about? Oh, it's the emojis and just to visit a couple of customers and that came in And, these are really need our help. And, they will see us, okay. These are from, what do you call it, the mail the mail, the packaging sorter to warehouse management, to massage chairs to hospital bed and looking and they have a different kind of a design that each design take them half year or 3 months to half year. And we can go in there with our standard product, standard module. And sometimes they want to buy us our buy models and we buy from a third party. We produce several standard product. And we use the programs to change it. These are significantly change our business. We sell instead of a few dollars a chip. Now we sell 20 dollars, $30 module now. And and our customers or those customers really want this product. And so they're not having to go through a design. So that's a that's kind of thing to get me excited. I think just to add to that, sort of two things that all of our R and D is focused on right now is really the ease of use and that we're really focused on selling our customer solutions as opposed to just an individual IC. And one thing just to confirm, Bernie, I think last earnings call you talked, you said that adoption of ASC 606 has negligible revenue recognition impact on Q1 revenues. And that's still true going into the next quarter. Is that correct? That is correct. We're going to sell 2 model, right? We never have a sell through model. Yeah, we only, our business, we had a very small portion of it that was on sell through. The beginning of the company, inception of the company, we'll always do sell 2 models. Correct. You buy a product, you own it. We don't have Excellent. Thanks so much. Thank you. Is from William Stein from SunTrust. Thank you. At this time, I'm showing no further questions. I would like to turn the call over to Bernie Bledgen, Chief Financial Officer, for closing remarks. I'd like to thank you all for joining us for this conference call. As a reminder, MPS will be hosting an Analyst Day on June 7th at our offices in San Jose, California We expect this to be an informative update on MPS's strategic direction. I hope you will be able to join us. And if you are unable to join us on June 7th, I look forward to talking to you Again, during our second quarter conference call, which is likely to be at the end of July. Thank you, and have a nice day. Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may now disconnect.