Q3 2019 Earnings Call
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I would now like to hand, the conference over to your Speaker today, Joe Shiffler director of Investor Relations. Thank you. Please go ahead Sir.
Thank you.
Good afternoon, and thanks, everyone for joining with me on the call today are bothered by the Christmas President and CEO power integrations, and Sandeep Meyer, our Chief Financial Officer.
During the call today, we will refer to financial measures not calculated according to generally accepted accounting.
Please refer to todays press release, which is posted on our investor website for an explanation of our reason for using such non-GAAP measures as well as tables reconciling these measures to our GAAP results.
Our discussion today, including through a nice session.
Include forward looking statements, which Babe maybe denoted by words like will would believe should expect outlook forecast and similar expressions of look toward future events or performance.
We're looking statements are subject to risks and uncertainties that may cause actual results could differ materially from those projected or implied Mercedes.
Such risks and uncertainties are discussed in our press release and that our most recent Form 10-K , probably FCC on February 13 2090.
Finally, this call is the property power integrations and any recording a rebroadcast expressly prohibited without the written consent of power integrations now I'll turn the call over at about.
Thanks, Joe and good afternoon.
Before we get to our third quarter results I'd like to comment on the conclusion of all the litigation with on semiconductor.
He believed the settlement is a landmark win for our company demonstrating the durability and the value offload intellectual property as well less of a determination to protected from unlawful use.
As many of you know this litigation began 15 years ago, when infringing products from pitch <unk>, we're doing cdis harm to our business.
Being a much smaller company at that time, we knew that patent litigation would have a meaningful impact on our bottom line and distract us from a running the business.
But the lab as an innovation driven company, we knew that the long term health up all the business depends on ensuring that our intellectual property is use solely for the benefit of our company and its owners.
Indeed, IP protection has been deeply ingrained in our culture from the only gets days of the company guiding everything from our choice of manufacturing partners to the location up all the R&D centers to what I T policies and that was it got us approached the right thing happens.
We are confident from the outset.
We were confident from the outside that in spite of the cost litigation was the right pad and the outcome as food. That's correct me one permanent deductions in 2008, and 2014 covering hundreds of infringing Fitch have products sheltering our market share and I would model as well enhancing go other petition.
As the leading innovator in our space.
And while the removal of infringing products when the market was our primary aim. We also saw compensation for the harm done to all the business that goal was achieved in large measure this week when they see how done $75 million from on semiconductor.
All litigation between the two companies is now being withdrawn and we expect a substantial reduction in operating expenses beginning in the first quarter up 2020 .
Well. This litigation is now in the past the expected to have important consequences going forward.
As valuable <unk> about early I didn't mention have proved to be.
We believe our biggest breakthroughs and our most valuable IP has only recently come to market.
Innovations such as our Innoswitch products, our flexing isolation technology, and our new Gan switches are fundamental technologies that will help fuel our growth for many years to come and we have more such technologies in the pipeline.
We hope that our success in combating infringement in the past will discourage such activity in the future.
Moving onto our third quarter results revenues increased 11% sequentially to just over $114 million.
That's an increase of 4% compared to the third quarter of last year as we did turn to yodle. What do you have growth ahead of the broader analog industry.
While revenues from the broad based industrial and consumer categories remain below the levels up a year ago Communications revenue grew nearly 40% year over year in the third quarter ads, we continue to be in market share in the smart phone charger market.
As we have discussed in on prior calls.
The mobile device market is rapidly adopting faster charges as Oems look for new features to differentiate their products.
This trend is enhanced by the use of larger batteries, which of course take longer to charge unless that paired with a higher wantage power supply.
The introduction of Fiveg phones should further reinforce the trend.
As Fiveg functionality is expected to stimulate even greater usage of mobile devices.
I'll, let you must which products are the clear leader in fast charging applications, all putting the highest levels of efficiency and integration available in the market.
Efficiencies a crucial factored in fast Chargers since the wasted energy producers heat.
Dissipating heat typically requires two things neither up it up which is desirable in mobile devices.
Heat sinks, which add weight as well as cost and surface area, which by definition means a lot and closure.
It is direct relationship between efficiency and size in fast charges, resulting in a substantial competitive advantage for our products.
In Q3 hour Innoswitch study and Innoswitch to the pro devices won several new high volume designs for past charges ranging from 15 to 31.
We also won our first inbox design fought a Gan based charger is 65 watt design for a major Chinese OEM, which we believe to be the highest power adapter, yeah, but package with the pool.
According to the OEM. It Delaware's is zero to 100% charge in half an hour with the small form factor and not get things, which can only be achieved with the efficiency of the Gan based innoswitch products.
As we noted last quarter. We believe we are the only company currently shipping high voltage again products in high volume.
In addition to this new inbox design, our Gan based products that already being used in a variety of aftermarket charges that are widely available at retail.
In fact, I was pleased to daily would be one millionth unit of Gan based Innoswitch products last month to the CEO of anchor innovations one of the world's leading suppliers of aftermarket power supplies.
And then early adopter awful lot of Gan based devices.
Our sales off Gan based ice is I've now closing in on the million you total units shipped and we expect to be shipping more than a million units per month in the very near future.
Looking ahead to the fourth quarter, you're projecting revenues of $114 million, plus or minus $3 million, which would be an increase of 22% year over year at the midpoint.
While smartphone charges will again be the key growth driver. We also expect that it turned to Youtube video growth in the consumer end market.
Sell through in consumer has exceeded selling for four consecutive quarters, indicating that while that is up a henson in the supply chain inventory levels are healthier than they have a year ago.
And while trade related headwinds continue we remain as excited as ever about the fundamentals of the appliance market, which not only values that reliability and efficiency benefits I thought products, but also continues to experience. They think dollar content and growth from the expanding middle class in emerging markets.
In addition, our new bridge switch motor drive products get wasn't entirely new growth vector in appliances.
And we are highly encouraged by the level of customer interest.
We expect our first design win with good switch to go into production in Q4, and we anticipate a gradual but study them beginning in 2020 with that I'll turn it over to Sundeep for a review of the financials.
Thanks by the one good afternoon, while we're still working to finalize the accounting and tax implications of the litigation settlement I will begin by briefly summarizing our current expectations first as Bobby mentioned, we received a payment of $175 million from on semi.
Earlier this week.
We expect to be out between 12, and 16% of this amount in cash taxes before the end of the fourth quarter.
Including our normal quarterly free cash flow, we should exit the a with around $400 million in cash and investments on our balance sheet.
We intend to continue managing our cash.
Always have using a combination of internal investment selective M&A opportunistic buybacks and dividends to return value to our shareholders.
As noted in our press release, our board has increased the quarterly dividend to 19 cents bushehr effective in the current quarter.
On the income statement our results for the fourth quarter <unk> will include again, along with an offsetting tax expense.
Beginning in the first quarter of 2020, we also expect a reduction in operating expenses.
Prior to the settlement, we work on a run rate of $8 million to $9 million, an annual spending for patent litigation the bulk of which was related to the now settled cases.
Our current expectation is that the litigation expense will fall to approximately $2 million in 2020 based on cases currently pending.
We intend to reinvest 25% to 30% of the savings into the business, resulting in an expected annual expense reduction of about $4 million for 2020.
Now I will briefly cover off in Q3 financial results, which are very straightforward.
Revenues $114.2 million, just above the midpoint of our range and up 11% from the prior quarter.
The increase was driven by communication got degree, which increased more than 30% sequentially driven by strength in cellphone charges.
Industrial revenues were also strong in growth increasing double digit sequentially driven by high power applications smart meters and although broad based industrial applications.
Consumer revenues were down mid single digit sequentially, reflecting seasonal softness in air conditioning.
Why computer revenues were down slightly from the prior quarter.
The revenue mix for the quarter was 34% industrial 32% consumer, 29% communication and 5% computer.
From a margin standpoint, the strength in industrial largely offset the pressure from higher communications revenue, while cost reductions provided some uplift, resulting in a non-GAAP gross margin of 52%.
That's up 80 basis points from the prior quarter and that the high end of our guidance.
non-GAAP operating expenses, what $35.4 million down about $800000 sequentially and below our forecasted range driven by the timing of headcount addition, and equipment purchases.
non-GAAP operating margin increased by 500 basis points sequentially, reaching 21%.
The non-GAAP effective tax rate for the quarter was 7%, bringing our non-GAAP earnings to $23.3 million or 78 cents per diluted share.
Cash flow from operations was $21.8 million for the quarter, while capex was $6 million.
Inventories are flat in dollar terms, but fell by 15 days from the prior quarter 244 days.
Inventories are down by 34 days over the past two quarters.
Though I do expect a modest rebound in the December quarter.
After a drop of two four weeks in the June quarter channel inventory tick back up as is typical of the September quarter.
Specifically weeks in the channel rose to 7.6 week.
Nine tenths of a week from the prior quarter.
Looking ahead, we expect fourth quarter revenues to be in the range of $114 million plus or minus $3 million.
I expect consumer revenues to be slightly higher as a percentage of revenue as air conditioning rebounds from the seasonal slowdown in Q3.
As a result mix should provide a slight helped to gross margin along with continuing cost reduction.
Specifically I expect non-GAAP gross margin to be around 52.5%.
Which would be an increase of about 50 basis points from the September quarter.
non-GAAP operating expenses for the fourth quarter should increase sequentially driven largely by headcount growth.
I expect non-GAAP opex to be between 36 and $36.5 million.
Lastly, I expect the non-GAAP tax rate for the quarter to remain at around 7%.
And with that I'll turn it back over to Joe.
Thanks, Sandeep, we'll open it up now for the Q and a session. They would you please give instructions.
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Your first question comes from the line of course, Anthony Burke with Stifel. Your line is open.
Yes. Thank you congratulations on the result, especially on the settlement but would on.
First question Balu another we.
Looking at the faster to market kind of moving into a higher gear I guess that means higher power levels.
Could you talk a little bit about where is the market right now and let's say 18, what adapters and a bold and then perhaps on the other and how much of the market. Today would you say is Gan based that Theres just source.
Just if we can get a sense for you know how how the Hello that penetration is right now and where it's essentially head.
Thanks, though right.
In terms of fast charging most of the Oems have gone to somebody in the 15 to 25 what range for their smartphones that are still some five watt designs are in place maybe 10, what designs, but we are seeing that rapidly switching over to add too.
The higher power Chargers. So it's a so dynamic I couldn't tell you exactly what percentage at this moment. It is so that's good news for us because we see that happening very fast now as far as Gan based charges.
That really go into the high end of the spectrum is just beginning as we speak we mentioned the 65 Watt charger announcement, which happened on October 10.
That is by far the largest a water charger, we've ever seen with the cell phone.
But we are hoping we are hopeful that other people will follow because it is a significant advantage to the user to be able to charge the phone faster. So if that is a.
Kind of a a water between the Oems to see how fast can charge that could take off quite well, but it's hard to predict at this point.
The we are working with a number of Oems and aftermarket customers and you you have already seen that there are many aftermarket products using gan based charges because they are the early adaptors, but we are optimistic that gan will spread over time.
At this year that expecting something in the mid single digit billion dollars in revenue and that could very well be in a well into double digits next year.
In terms of millions of dollars in revenue for gas, but it's hard to predict at this point.
That's very helpful. Then and if we look at Gan technology and itself you you talked about being a obviously a landmark for for the company. Obviously today, we're talking a lot about fast charging but when should we start to see again, perhaps penetrating some of your other end markets and can you give us.
As any examples applications that you're working on right now.
Sure we already have Ed design win on a TV application with the large OEM once again, the the volumes are starting out small but that could change.
Change very rapidly we are just about to win at design a at a a large TV customer in China.
We also have an appliance customer in Europe , who is designing with again, what other facilitated application.
Primarily because of their efficiency benefits are required to meet the efficiency standards. So we are actually quite surprised at the interest in gan across many different applications.
That's helpful. Just one last question for Sundeep Sundeep 175 million in cash coming in you talked obviously about the dividend increase it talks about reinvesting in the business.
Hi, how should we think about the where that cash eventually it's going to go going forward.
I think if you look historically, we've had that full brown the approach, which you let's start out two of them and we have done selective M&A.
You know I've done buybacks. So I don't I think the approach is going to be very consistent with the four pronged approach and again, we're going to do it very opportunistically, you're not going to be in a hurry, but do it very smartly. If you look historically, even on our buybacks as you know very well we've been very opportunistic on aerospace paid us very well, so I don't think they're going to.
Change our approach and don't expect that you know for us to do you know these selective big diverted increases one died we want to be doing those kind of thing.
Sounds good congratulations again.
Thank you Thanks story.
Your next question comes from line up Ross Seymore with Deutsche Bank. Your line is open.
Hi, guys. This is Melissa on behalf of Ross Congratulations on Monday litigation when I guess for the first question I was wondering if you guys could talk about what you're expecting I know you don't guide one quarter out, but how can we think about seasonality and the coms and segment now that you guys.
I have this back when and what can we expect in the first quarter.
So.
That's a good question then basically considering that we are gaining share in the rapid charging and cellphone area you should see a meaningful decline, which is typical in that business, but also for us. Another area that typically comes down as industrial which is in the high bar business because of our.
Dr span and the budgets being form so directionally I would say that you should see a significant declined sequentially, but on the other had I would say you should see for next year Directionally a good sequential increase in Q2 and sequential increase in Q3, we believe that we will out.
Grow the industry very nicely last year, not only by the success and the market share gains we are having in cell phone, but by the introduction of new products that I think we'll start contributing like rich switch.
Neenah marks and others.
Okay. Thanks, and then.
Gross margin guide for next quarter I apologize, if I missed it but so how much of that is being driven by mix and how much of a drag easing comps will be for next quarter, and then sort of what are your expectations for that higher margin industrial.
You know that comes on our dollar basis between Q3 in Q4, you're not going to see as much change, but as we have talked seasonally Q4 is that are much better quarter for our consumer because of air conditioning coming back and you know so that is part of the reason and also you know a little bit up a lot higher volumes that we have had has helping.
Q O Q4, but directionally, if you're looking at gross margin with the continued success that we are having in.
Rapid charging and the and that continues design successes. We believe next year from a modeling perspective. The gross margin will be impacted entered should model as I've talked before some at around 51% for 2020 on a non-GAAP basis.
Okay got it and then one my high level question you guys have talked a lot about the your competitive advantage with your can products could you talk a little more about how you're differentiated and your other end markets like in industrial and consumer how do you view that can competitive landscape and knows and Mike.
Yes.
Well again is only part of the technologies, we offer we have a innoswitch and the number of derivatives of Innoswitch like you know MCCS.
And also you know pro but we also have products that go into new markets like motor control, which is the bridge switch which uses its own unique technology.
So, but the fundamental common thread between all of them is efficiency.
We offer much higher efficiency than any existing solution.
And we also half of the highest integration that means fewer components more reliability, which is very attractive in the industrial consume a computer markets and of course.
The efficiency is also important to make the adapter small and that said we are growing the most at the moment.
But the the revenue growth will follow in other areas, which have a slightly longer design cycle like in industrial and consumer.
So it's not just any one technology is a combination of technologies that offers them its system level solutions.
And the benefits that come from from the combination of these.
Okay, Thanks, guys and congratulations on the South corridor I.
Thank you.
Your next question comes from the line is David Williams must loop capital. Your line is open.
Hey, good evening and thanks for the time and congrats on that at quarter end the litigation finally.
Thanks, David.
Just kind of thinking about from the fiveg opportunities in terms of the charging the bad requirements. We're seeing a few thoughts you can't sit on the market, especially in China for at least in development.
What are you seeing in terms of the power requirements, there and what they're adopting are you seeing anything that really supports that that expanded power expectation that you've had.
Yes in fact, a the fiveg will make fast charging even more critical.
And the reason for that is the fight the phones.
We'll be utilized more continuously because of the the bandwidth that provides there'll be more video downloads and.
In general it will be used more often which means that you have to charge the batteries.
I'd have to make the batteries bigger if it make it big then obviously you need more power to charges in the same time.
So all of that bodes very well for us. So we look forward to even higher power levels in charging cellphones and therefore, all of our technology will become much more relevant going forward.
Great.
And then just kind of listening to 20 of your peers. They had noted some pool in ordering they thought for a specifically in surveillance, but just kind of curious you saw an uptick here that is typical in the quarter in terms of channel inventory, but are you seeing anything from any specific areas, maybe where there could be some pull ins ahead of any further trade restrictions.
No that is no pull in it is for us the little increase that popped and was because of some design wins that we had on the communication segment, and that's where the disties have to satisfy that it's just a timing issue and.
But as you know there's always during this time, a little uptick so for us it's not anything unusual considering how much our inventory had dropped in the last couple of weeks in the channel I mean last couple of quarters.
Okay.
And then just one last one here if we're thinking about the bridge switch, which you mentioned for the motor control and just kind of given the industry 4.0 evolution that expected.
To happen soon.
And that's really centered around the efficiency. How do you think you can perform in that market I guess longer term what are your expectations, specifically for the bridge, which bridge, which solution in the motor control is home.
Well.
Many countries have a very strict regulations and efficiency, which continue to get tighter every year.
So what is happening is that that things like washing machines dishwashers and refrigerators.
There are new efficiency requirements that force them to go into a bill DC brushless DC motor that require electronic motor control.
Which is where the bridge, which provides a solution.
What is surprising to us is even things like the water problems in a dishwasher, which is used in frequently are going to be LDC. They used to be does the either DC motors or AC motors, but no they're going to brushless DC Motors, Ed just to get that additional efficiency and also some other benefit.
The brushless DC motor bring reduced noise and so on.
But the biggest area is in.
Refrigeration and air conditioning with.
The motors run continuously and therefore, the efficiency becomes extremely critical even a little bit of improvement in efficiency.
Allows them to have lot more margin in other areas to meet the efficiency requirements.
Great. Thanks, so much for the time the best of luck on the quarter.
Okay. Thank you.
As a reminder to ask your question. Please press star followed by the number one on your telephone.
Your next question comes from the line of Christopher Rolland for Susquehanna. Your line is open.
Hey, David Haverly on behalf of Chris Tonight.
Yes, thanks for taking my questions I guess first from from a bit of a higher level can you talk about the linearity of orders in the September quarter, and what you've seen thus far in October and you are guiding.
Flat might be a little better than some others. We've heard so far this earnings season.
So for US the quarter began with the backlog at the beginning a little lower so the tons that we need compared to the previous quarters of their guns, we need is slightly higher somewhere around high thirtys.
But as we have talked about the design wins that we've been having the success. We are having in rapid charging a guide reflects and then also the seasonal uptick that we get an air conditioning is reflective in our guidance.
I would also like to add that the bookings.
Talk about this month have been a stronger and so that's also is the used in calculating EPS guidance.
Got it.
Two quick ones on the Mcgann product is there a wattage threshold, where you just see that gain in such a no brainer for Oems in terms of advantages I.
I guess for example, and make a 15 lot charger or you are you competing with you again and your traditional product there in this offering both to customers and what are they choose.
Well generally Gan becomes a interesting at 30 watts and above all.
Almost independent of the application.
But there is also a higher cost associated with again, Ghana is more expensive.
But at a system level. It offers a number of advantages in terms of size efficiency lack of heat sink and so on when you go to higher power levels.
I think in the long run we see Gan, becoming very prevalent about the 30, roughly 30 was sent about.
We think we have by far the best Gan technology, which is the totally proprietary technology, but a different from everybody else.
And I think that we are the only company shipping Gan in high volume, even though there has been talk about again for a long time as Fargo going as far back as 15 years, but if you look in the market is hard to find any commercial product using Gan until we started shipping in high volume.
And so I think that's at the benefit as we have a very cost effective Gan, we have a again that is a proven in the market and so we think we're in a very strong position to transition from silicon switches to against switches over a period of time over the next few years.
Got it very helpful. I mean, one last one for me I know a lot of again stuff is aftermarket right now, but as you think about going into that kind of the next year. How do you think about split between aftermarket versus inbox, where do you think that's ultimately going to shake out.
Well that's a good question that right now I would say the aftermarket is relatively small.
It's not very significant compared to the overall.
OEM market, having said that a number of William sort of actually looking at Gan as we speak.
When they when they come out with Gannett will generally be on the higher end of that phones. So the volumes it'll have to gradually grow because of the higher price of the product. But then if you want to go to something like 40, 550 watts that is really no other way to do this and have the size.
Reasonable.
People don't want a cat is big bricks for their cell phones.
If you want to make it as small adapter you really don't have much of a choice and we hope that the increase in power will drive.
More Oems into the Gan technology.
Thank you.
You're welcome.
There are no further questions in queue at this time I turn the conference back over to our presenters.
Okay, we'll leave it there thanks, everyone for listening there will be a replay of this call available on our Investor website, which is investors power dot com. Thanks, again for listening and good afternoon.
This concludes today's conference call. Thank you for your participation you may now disconnect.