Earnings Call Transcript
MONOLITHIC POWER SYSTEMS INC (MPWR)
Earnings Call Transcript - MPWR Q2 2020
Genevieve Cunningham, Moderator
Welcome everyone to the MPS Second Quarter 2020 Earnings Webinar. Please note that this webinar is being recorded and will be archived for one year on our Investor Relations page at www.monolithicpower.com. My name is Genevieve Cunningham and I will be the moderator for this webinar. Joining me today are Michael Hsing, CEO and Founder of MPS; and Bernie Blegen, VP and CFO. During this webinar, we will discuss our Q2 2020 financial results and guidance for Q3 2020, followed by a Q&A session. Analysts you are currently muted. In the course of today's webinar, we will be making 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 February 28th, 2020 and our Form 10-Q filed on May 11th, 2020, 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 margin, operating expense, R&D, and SG&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 Q2 2019, Q1 2020, and Q2 2020 releases, as well as to the reconciling tables that are posted on our website. Now, I'd like to turn the call over to Bernie Blegen.
Bernie Blegen, VP and CFO
Thanks Gen. MPS achieved record second quarter revenue of $186.2 million, 12.3% higher than the first quarter of 2020 and 23.3% higher than the comparable quarter in 2019. Second quarter revenue growth was broad-based except for automotive. Our strong year-over-year revenue growth for 2020, in spite of the COVID-19 pandemic, was a result of our diversified growth strategy and our technological innovation. Maintaining this level of superior performance and realizing future growth opportunities requires us to step up investments in capacity, infrastructure, quality assurance, and headcount. We are also expanding our operating capabilities outside China. Turning now to our second quarter 2020 revenue by market. Second quarter computing and storage revenue of $64.1 million increased $12.1 million or 23.3% from the first quarter of 2020. Computing and storage revenue represented 34.4% of MPS' second quarter revenue. The sequential revenue increase reflected strength in storage revenue along with increased notebook revenue. Second quarter server revenue maintained the elevated levels achieved in the first quarter of 2020 and server revenue was significantly higher than the second quarter of the prior year. Second quarter consumer revenue of $47.7 million increased 27.4% from the first quarter of 2020 and represented 25.6% of our second quarter 2020 revenue. The sequential quarterly revenue increase reflected improved sales of products for home applications, IoT, gaming consoles, and VOT, a new acronym which stands for a Variety of Things. Second quarter 2020 communications revenue of $30.1 million was up by 8.0% from the first quarter of 2020. Product sales for communications infrastructure, including 5G networking increased sequentially as did sales of legacy router and wireless applications. Communications sales represented 16.2% of our total second quarter 2020 revenue. Second quarter industrial revenue of $26.6 million increased 5.4% from the first quarter of 2020, as increased revenue for power sources more than offset a decrease in security-based product sales. Industrial revenue represented 14.3% of our total second quarter 2020 revenue. Second quarter automotive revenue of $17.8 million fell 23.7% from the first quarter of 2020 as the number of automotive OEMs shut down production for most of the quarter in response to the COVID-19 pandemic. The range of applications MPS encompasses now includes infotainment, smart lighting, ADAS and autonomous driving. Again, we believe MPS is well-positioned to accelerate growth in automotive when the market returns. Automotive revenue was 9.5% of MPS' total second quarter 2020 revenue. I should point out that despite the past four months of COVID-related travel restrictions, our design activities remain largely unimpacted by the pandemic and have exceeded our expectations across the board. We have seen solid engagement particularly with top-tier customers. These new and continuing customer relationships position MPS for long-term success in these critical markets. GAAP gross margin was 55.1%, 10 basis points lower than the first quarter of 2020 and flat compared with the second quarter of 2019. Our GAAP operating income was $28.0 million compared to $31.0 million reported in the first quarter of 2020 and $20.1 million reported in the second quarter of 2019. Non-GAAP gross margin for the second quarter of 2020 was 55.7%, up 20 basis points from the gross margin reported in the first quarter of 2020 and 10 basis points higher than the second quarter from a year ago. Our non-GAAP operating income was $53.0 million compared to $45.9 million reported in the prior quarter and $43.7 million reported in the second quarter of 2019. Let's review our operating expenses. Our GAAP operating expenses were $74.6 million in the second quarter of 2020, compared with $60.5 million in the first quarter of 2020 and $63.1 million in the second quarter of 2019. Non-GAAP second quarter 2020 operating expenses were $50.7 million, up from the $46.1 million we spent in the first quarter of 2020, and up from the $40.3 million reported in the second quarter of 2019. The differences between non-GAAP operating expenses and GAAP operating expenses for the quarter as discussed here are stock compensation expense and income or loss from an unfunded deferred compensation plan. For the second quarter of 2020, total stock compensation expense including approximately $642,000 charged to cost of goods sold was $21.0 million, compared with the $18.6 million recorded in the first quarter of 2020. Switching to the bottom line. Second quarter 2020 GAAP net income was $30.2 million, or $0.64 per fully diluted share compared with $35.8 million, or $0.77 per share in the first quarter of 2020 and $20.7 million, or $0.45 per share in the second quarter of 2019. Q2 non-GAAP net income was $50.6 million, or $1.08 per fully diluted share, compared with $44.3 million, or $0.95 per share in the first quarter of 2020, and $41.9 million, or $0.92 per share in the second quarter of 2019. Fully diluted shares outstanding at the end of Q2 2020 were $46.8 million. Now, let's look at the balance sheet. Cash, cash equivalents and investments were $515.4 million at the end of second quarter of 2020, compared to $492 million at the end of the first quarter of 2020. For the quarter, MPS generated operating cash flow of about $59.3 million, compared with Q1 2020 operating cash flow of $51.4 million. Second quarter 2020 capital spending totaled $14.6 million. Accounts receivable ended the second quarter of 2020 at $55.1 million, representing 27 days of sales outstanding, which was three days lower than the 30 days reported at the end of the first quarter of 2020 and six days lower than the 33 days in the second quarter of 2019. Our internal inventories at the end of the second quarter of 2020 were $152.1 million, up from the $131.5 million at the end of the first quarter of 2020. Days of inventory of 166 days at the end of the second quarter of 2020 were five days higher than at the end of the first quarter of 2020. I would now like to turn to our outlook for the third quarter of 2020. As we are still in the midst of the COVID pandemic, demand visibility for the remainder of the year is not as crisp as we usually see at this point in the year. We are forecasting Q3 revenue in the range of $200 million to $210 million. We also expect the following; GAAP gross margin in the range of 55.2% to 55.8%, non-GAAP gross margin in the range of 55.5% to 56.1%, total stock-based compensation expense of $21.2 million to $23.2 million including approximately $700,000 that would be charged to cost of goods sold. GAAP R&D and SG&A expenses should be between $70.7 million and $74.7 million. Non-GAAP R&D and SG&A expenses should be in the range of $50.2 million to $52.2 million. Litigation expense should range between $1.8 million and $2.2 million, interest income is expected to range from $1.5 million to $1.7 million, and fully diluted shares to be in the range of 46.5 million to 47.5 million shares. In conclusion, we continue to grow year-over-year. We are excited about our design activities in the pipeline and expanding our reach in the new frontiers. I will now open the webinar for questions.
Genevieve Cunningham, Moderator
Thank you, Bernie. Analyst, I would now like to begin our Q&A session. Our first question comes from Tore Svanberg from Stifel. Tore, your line is now open.
Tore Svanberg, Analyst
Yes, thank you. Michael and Bernie, congratulations on another very strong quarter. Before I get into the near-term stuff, you did mention something at the beginning there that you are exploring some operations outside of China. I'm not talking about design centers here but are you working on something else on the manufacturing side outside of China at this point?
Michael Hsing, CEO
Yes. We try to expand another fab and we're exploring another 12-inch fab as well as an 8-inch fab outside of China.
Tore Svanberg, Analyst
Okay, very good. And as we look at the September quarter and congratulations on getting to $200 million in quarterly revenue, could you maybe talk a little bit about some of the end markets that's going to drive that growth? I mean, I'm sure the storage and server business is going to continue to remain strong. But maybe give us the puts and takes on each end market going into the September quarter?
Michael Hsing, CEO
Yeah. Tore, our product is a very fundamental use of building blocks. We supply power to power management for all electronic devices including automotive. And now one segment clearly in this pandemic that everybody knows is the infrastructures for telecommunications and data centers as well as IoTs and the PCs, and they'll grow. MPS just supplies these building blocks for all these segments. As Bernie said earlier, other than automotive, all segments are doing well.
Bernie Blegen, VP and CFO
Very broad based.
Tore Svanberg, Analyst
Very good. Just one last question. The DSO is pretty low now, Bernie. And I mean, I assume that's just purely linearity. Anything else going on there?
Bernie Blegen, VP and CFO
No. I think we've always had a very good track record with credit and collections and the 27 days in the quarter really is a reflection of how front-loaded the initial sales were in Q2.
Tore Svanberg, Analyst
Congratulations again. Thank you.
Bernie Blegen, VP and CFO
Thank you, Tore.
Michael Hsing, CEO
Thank you, Tore.
Genevieve Cunningham, Moderator
Our next question comes from Quinn Bolton from Needham. Quinn, your line is now open.
Quinn Bolton, Analyst
Thank you, and let me echo my congratulations. I guess Bernie, you made some comments about visibility being a little bit less clear today than in years past, obviously COVID it's understandable with the COVID outbreak. But I guess you guys have had a very strong sort of first three quarters of the year including guidance for September. Just wondering can you talk to us about your thoughts on the sustainability of this demand? Or are there certain factors perhaps the game console ramp that may be leading to some particular strength in the September quarter that may soften seasonally as we look out beyond the September quarter? And then I've got a follow-up.
Bernie Blegen, VP and CFO
Sure. I think that just given the nature of the current macro environment where we did benefit from accelerated ordering patterns, particularly in at the end of Q1 that we don't want to become complacent, because we have seen falloffs in demand after we've had a big run-up like we just experienced. So it isn't that we're seeing anything specifically in the market that causes us concern, but just past experience tells us that it's something that we have to monitor.
Michael Hsing, CEO
Yes. Bernie's comment was very similar to our statement in Q1 and Q2. We didn't expect at the time that all segments will grow including automotive. And so what is the magnitude of the growth is to our surprise. And even during the first couple of quarters, we mentioned again we have more orders than we can ship. And so now we're going to the second half of this year, the macro conditions to us is not very much unsettled. And so we will prepare to change quickly. And but overall, orders are still very good.
Bernie Blegen, VP and CFO
And one last thing just to follow-up on Michael's comment there is that in the beginning of the year, we did have concerns about supply chain capacity. And we've lowered that risk, but that's still an issue that is requiring ongoing management.
Quinn Bolton, Analyst
Understood. And then longer term, you mentioned you're positively surprised by the strength of the design activity particularly with Tier 1s. I'm sure you're not going to name customers, but are there a couple of applications you might be able to highlight for us that you're really excited about over the next year or two?
Michael Hsing, CEO
A couple of them clearly is 48 volts and as we talk about it and the other one is in the data centers business. And also as Bernie mentioned earlier in automotive, we are heavily engaged and have a lot of activity in ADAS.
Bernie Blegen, VP and CFO
And I think to keep in mind that in a lot of the markets that Michael just listed is that we are relatively small players. So we have a lot of upside greenfield opportunities that should continue to drive our growth for the next two to three years at least.
Quinn Bolton, Analyst
You bet.
Genevieve Cunningham, Moderator
Our next question comes from Joshua Buchalter from Cowen. Joshua, your line is now open.
Joshua Buchalter, Analyst
Good day, thank you for taking my question and congratulations on the results. I wanted to start with the update on storage and computing. Given the significant potential, I was a bit surprised that servers were not highlighted as a contributor to sequential growth. Could you provide more details on whether this was because the first quarter set such a high standard, or was there something else happening in that market that caused it to grow less compared to the others? Thank you.
Michael Hsing, CEO
Yes. Server growth is not a surprise to us. And we talk about it in the past quarters. And we expected a growth from say from a year ago. And this year we will grow substantially from last year. So there are no surprises. And so our product is, as I remind everybody, it's still a power supply and we're powering up the CPUs and powering up all the electronic devices using a server.
Bernie Blegen, VP and CFO
Yes. And I think we tried to add some color to that in the prepared comments by saying that we enjoyed a noteworthy step up between Q1 and Q2 or Q4 and Q1 and we maintain that same high level in Q2. So when you look at the year-over-year server is one of our largest year-over-year growth drivers.
Genevieve Cunningham, Moderator
Our next question comes from William Stein from SunTrust. William, your line is now open.
William Stein, Analyst
Great, thanks for taking my question. Congrats on these very strong results. I'm wondering if Bernie you can talk to us about backlog versus turns expectations. I think last quarter we had this sort of special situation where you essentially guided for negative net turns, maybe you can confirm my recollection and clarify what guidance implies in that regard for Q3.
Bernie Blegen, VP and CFO
I think that the term that we referred to at the end of Q1 was the toilet paper effect that there was an outsized ordering pattern in the last four weeks of March and so we had to take Q2 to more closely understand what that represented. And after we went customer by customer and geography to geography, we found out that there were a couple of drivers. Well, three. The first was that there was a increased stepped up increase in demand and particularly as it relates to work-from-home applications. And so that included storage and 5G and notebooks and then as I said earlier continued strong ordering within automotive. But there was also an acceleration of demand where the distributors and customers wanted to get in line to make sure that they were not. So what we've had to do is a very close evaluation to make sure that we don't let the channel inventories rise too much because of over-enthusiasm. But at this point, we enter this quarter again with a similar backlog profile, as we had last quarter meaning that there's low reliance on turns business in order to meet our expectations.
Michael Hsing, CEO
Our initial assumption about the toilet paper effect was incorrect. There is very little impact from that. As we examined our customers and distributors more closely, we discovered that the growth we are experiencing is genuine and has a degree of sustainability.
Genevieve Cunningham, Moderator
The next question is from Chris Caso from Raymond James. Chris, your line is now open.
Chris Caso, Analyst
Thank you. Good evening, and congratulations on the innovative conference call format, which seems to be effective. My first question is a follow-up to the previous one. Regarding your current capacity and the constraints you're facing, do you anticipate that these limitations could hinder revenue growth in the coming quarters? From our perspective, it looks like the situation is improving; the toilet paper effect isn't as concerning as we expected. Is there still enough potential for revenue growth in the next few quarters as you implement your capacity plans?
Michael Hsing, CEO
Yeah. Let's put it this way, our production people are working at over 100%. And we still have more revenue that we can ship. I mean, we can order more than we can ship. And as we increase the capacities in the last six months, the issues are much better now.
Bernie Blegen, VP and CFO
And I would also probably just having learned from this recent experience that we're more likely to also increase our internal inventories, so we don't have to rely upon necessarily in the moment production excellence.
Chris Caso, Analyst
Great. As a follow-up regarding the compute segment, we've heard from others that certain areas of the compute market may be slowing as we move into the second half of the year. There was some work-from-home demand, and in the case of notebooks, it appears to have been pulled forward to the first half. Intel mentioned a potential decline in cloud data center revenue after several robust quarters. While I know you have increased your content significantly, my questions are: is this slowdown something you're observing as well? And are the increases in your content greater than the overall trends in the market?
Michael Hsing, CEO
We are new entrants in the market and relatively small in size. We do not observe any slowdown in our revenue growth. As we increase our market share, we will be able to provide a more detailed answer to your question.
Genevieve Cunningham, Moderator
Our next question comes from David Williams from Loop Capital. David, your line is now open.
David Williams, Analyst
Perfect. Thank you. And thanks for letting me ask a question and congrats on the quarter. I guess the first question is really around the gaming console. And maybe if you could provide any color around the benefit in the quarter from the gaming console and then maybe how that layers into the remainder of the year.
Bernie Blegen, VP and CFO
I think that the gaming console is a very somewhat predictable business, as far as there's almost a bell-shaped curve that occurs over five months beginning in June and ending in October. So that is pretty heavily weighted towards Q3 for what we sell into. And right now the visibility will not be crisp, is the word we used before, probably until late August or early September. Though, right now, we seem to be tracking very well against our expectations.
David Williams, Analyst
Okay. So you'd characterize that as maybe stable to towards your expectations?
Bernie Blegen, VP and CFO
Yes. Stable is not a word I normally assigned to gaming consoles, because it does create this bubble which has certain of its own management challenges. But, yes, I would say that the demand is meeting our expectations and we have adequate supply chain to handle it.
David Williams, Analyst
Great. And then maybe thinking about the data center and maybe from the computing, how much of this do you think is maybe pull ahead versus more cycle related? Do you think this is sustainable? I realize you're a smaller player, but do you think you're seeing any pull ahead here? Or do you think all of this is maybe natural demand that would have come through pandemic or not?
Bernie Blegen, VP and CFO
No. I think the work from home phenomena is real and at some level, we are able to quantify it. But I do think that it is a more front-end loaded cycle as we sort of offered an earlier response. And the only thing to really add is that we're such a small player and this is sort of our first opportunity to really experience accelerated revenue growth, again our visibility and predictability is a little bit low for us right now.
Genevieve Cunningham, Moderator
Our next question comes from Rick Schafer from Oppenheimer. Rick, your line is now open.
Rick Schafer, Analyst
Thank you. Great job, everyone. My first question is about 5G. Could you provide an update on the progress of our entry into the 5G market? Additionally, can you share how many units are currently being shipped?
Michael Hsing, CEO
Rick, your question is difficult to hear and understand. We can attempt to address your inquiries. 5G represents one of our largest opportunities, focusing on highly concentrated customers. Unlike 4G, where we had minimal revenues, we've established ourselves as a significant player thanks to our technology. Regarding growth and regional expansion, China is currently emphasizing 5G, with Huawei being the leading player. Other regions are slower in their engagement. As for the impact on our future business, I think it's just a matter of time. The longer we wait, the better it potentially is for MPS and other players familiar with our technologies. Time is on our side, although it might affect our revenue in the short term. However, in China, we continue to see growth in the 5G network.
Genevieve Cunningham, Moderator
Our next question comes from Kamil Mielczarek from William Blair. Kamil, your line is now open.
Kamil Mielczarek, Analyst
Good evening. Thanks for taking my question. First is I just want to follow-up on 5G. Can you provide some detail on how to think about the content you have and specifically the potential SAM given your POL products can be used in transceivers, base stations, fiber optic networks and back-end data centers? And I assume there's a potential for QSMOD as well?
Michael Hsing, CEO
Yes. You're absolutely right. Our opportunity we don't have a clear picture because again our product there is very fundamental in supplying powers and doing power management for each component. And it's really a rough calculation it's more than $40, $50 per station.
Kamil Mielczarek, Analyst
That's great. Thank you. And just a quick follow-up. How should we think about your entrance into the HPA market? I believe you are initially targeting medical and communication applications. And what's your differentiation versus competitors like TI? And lastly, is this a 2021 revenue event?
Bernie Blegen, VP and CFO
The primary competition is really with ADI and this is the advanced analog. And you're exactly correct that the first opportunity that we're pursuing is actually with a customer and they've provided us their spec and we would expect to be able to have a product that can be prototyped by the end of this year and have initial revenue after that. As far as the longer-term road map, we talked about communications because it is the next targeted market that were high-performance analog.
Michael Hsing, CEO
Data converters. I missed the first part of the question. Okay. Go ahead.
Bernie Blegen, VP and CFO
Yes. So just finishing up where the need for high-frequency and high precision. And as I said, there are only one or two other players out there. It's a very difficult market to penetrate. But here again, we believe we are very well positioned to move into it over the course of the next three to five years.
Genevieve Cunningham, Moderator
Our next question comes from Tore Svanberg from Stifel. Tore, your line is now open.
Tore Svanberg, Analyst
Yes. Just a follow-up. And Michael, I'm asking this question because I really respect your view and if you look at Maxim, Linear, ADI, they've been competitors of yours for many years, whether for business or for engineers. They're now all going to be under one umbrella. What do you think that means for the analog space and perhaps for Monolithic power specifically?
Michael Hsing, CEO
Thank you for expressing your respect. I believe the situation remains consistent; Maxim and Linear Technologies are well-established companies that have previously competed with us. MPS is somewhat more agile in technology and product development, allowing us to grow at a faster pace. I think MPS is now becoming a significant player in the industry. If you compare MPS to Linear Technologies with their $1.1 billion, we are very close. Our customers are seeking second or multiple suppliers, and with our advanced technologies, I believe this will open up more opportunities for us.
Tore Svanberg, Analyst
Very good. Congrats again.
Michael Hsing, CEO
Thank you. Yes.
Genevieve Cunningham, Moderator
Our next question comes from Kevin Garrigan from Rosenblatt. Kevin, your line is now open.
Kevin Garrigan, Analyst
Guys, thanks for taking my question and congrats on a great quarter. Just a quick one for me. Can you give us a little color on your e-commerce business? I know with everything kind of virtual now in your recent agreement with Farnell Electronics, can you kind of talk about what's going on there?
Michael Hsing, CEO
Yes. Okay. That's the e-commerce glad that you still remember that. And I have to say it's very slow, okay, but I really believe that. We see some initial results. And after if you follow our website, it keeps evolving. And up to a point now we know how to double or triple the subscribers. And it's actually more than tripled and starts with small numbers. So we're still doing a lot of surveys. And now I think the website is good enough and that we can work with our partners and online partners and distribute the message more clearly. I hope to see a lot more results in the next few months. But overall, we still believe it. And we much believe in the plug-and-play solution, it will happen and online distribution, online sales, online configurations that will be the future. For MPS opportunities instead of dollar, sub dollar parts, now, we're selling against $4, $5 or beyond for each component. So, the opportunities still remain and we are still learning.
Kevin Garrigan, Analyst
Got it. Thanks guys.
Genevieve Cunningham, Moderator
Our next question comes from Quinn Bolton from Needham. Quinn, your line is now open.
Quinn Bolton, Analyst
Hey great. Thanks for letting me ask the follow-up question. Michael, you said some of the applications you're most excited about or center around the data center as well as 48 volts, so just a couple of follow-on questions. With NVIDIA's latest 7-nanometer generation of GPUs going into the data center, wondering if you're able to comment whether you're supplying any power management devices for that new 100 GPU either in a 12-volt or 48-volt SKU? And then longer term, as we look forward to the new Intel VR 14 spec, do you have a sense how much of that market might be 12-volt versus 48-volt? Thank you.
Michael Hsing, CEO
All right. Obviously, we don't mention customers' names and customers' project names. Let's put it this way, all the 48-volt product that we have is in it. And in terms of the VR 14 spec, we have a reference design in that. MPS will be compared via 13s and we're also a small part of it. And I think the opportunity for MPS. It became a significant player in the VR 14 in the next few years.
Bernie Blegen, VP and CFO
Both in the 12-volt as well as 48-volt.
Michael Hsing, CEO
Yes, for the 12 volts and 48 volts, my belief is mostly still 12 volts. And 48 volts, the application is still limited.
Quinn Bolton, Analyst
Great. Thank you for that color.
Genevieve Cunningham, Moderator
As there are no further questions, I would now like to turn the webinar back over to Bernie.
Bernie Blegen, VP and CFO
Great. I'd like to thank you all for joining us for this webinar. And look forward to talking to you again during our third quarter webinar, which will likely be at the end of October. Thank you and have a great day.