Alector Q2 2023 Earnings Call Transcript

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July 31, 2023

There are 9 speakers on the call.

Operator

Everyone to the NPS Second Quarter 2023 Earnings Webinar. My name is Genevieve Cunningham, and I will be the moderator for this webinar. Joining me today are Michael Singh, CEO and Founder of MPS and Bernie Blagen, VP and CFO. In the course of today's webinar, 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.

Operator

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 ks filed on February 24, 2023, and our Form 10 Q filed on May 5, 2023, which are accessible through our website. MPS assumes no obligation to update the information provided on today's call. We will be discussing gross margin, operating expense, operating income, other income, income before income taxes, 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. Tables that outline the reconciliation between the non GAAP financial measures to GAAP financial measures are included in our Q2 2023 earnings release, which we have furnished to the SEC and is currently available on our website.

Operator

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. Now, I'd like to turn the call over to Bernie Plagen.

Speaker 1

Thanks, Jen. MPS reported 2nd quarter revenue of $441,100,000 2.2% lower than the Q1 of 2023 and 4.3% lower than the Q2 of 2022. Compared with Q1 2023, sales and communications were lower, while industrial, Storage and Computing, Consumer and Enterprise Data improved sequentially. Turning now to our Q2 2023 revenue by market. Storage and Computing revenue of $124,500,000 increased 3.9% from the Q1 of 2023.

Speaker 1

The sequential revenue improvement primarily reflected higher commercial notebook sales. 2nd quarter 2023 storage and computing revenue was up 1.8% year over year. Storage and computing revenue represented 28.2% of MPS's 2nd quarter 2023 revenue compared with 26.5% in the Q2 of 2022. Q2 2023 industrial revenue of $49,700,000 increased 4.8% from the Q1 of 2023, Reflecting increased sales of products for power source and industrial meter applications. 2nd quarter 2023 industrial revenue was down 11.0 percent year over year.

Speaker 1

Industrial revenue represented 11.3% of our total 2nd Quarter 2023 revenue compared with 12.1% in the Q2 of 2022. 2nd quarter consumer revenue of $65,200,000 increased 2.9% from the Q1 of 2023. The sequential quarterly revenue improvement reflected higher gaming, TV and mobile device sales. Q2 2023 consumer revenue was down 33.0 percent year over year. Consumer revenue represented 14.8% of MPS' Q2 2023 revenue compared with 21.1% in the Q2 of 2022.

Speaker 1

In our enterprise data market, Q2 2023 revenue of $48,000,000 increased 1.7% from the first quarter of 2023, primarily due to initial shipments of new generation AI applications, which offset Softer demand for CPU applications. 2nd quarter 2023 enterprise data revenue was down 26.4 percent year over year. Enterprise data revenue represented 10.9% of MPS' Q2 2023 revenue Compared with 14.2% in the Q2 of 2022. 2nd quarter automotive revenue of 104 point $4,000,000 decreased 0.9% from the Q1 of 2023. 2nd quarter 2023 automotive revenue was up 71.1% year over year.

Speaker 1

Automotive revenue represented 20 3.6% of MTS' Q2 2023 revenue compared with 13.2% in the Q2 of 2022. Q2 2023 communications revenue of $49,300,000 was down 27.4 percent from the Q1 of 2023, primarily reflecting lower infrastructure sales. Q2 2023 communications revenue was down 16.9% year over year. Communication sales represent 11.2 percent of our total Q2 2023 revenue compared with 12.9% the Q2 of 2022. I'd like to make some general comments about our business.

Speaker 1

In our previous earnings calls, we had noted customer ordering patterns could oscillate. This has turned out to

Speaker 2

be the case.

Speaker 1

We continue to see some orders getting delayed or amended by pull in requests. This lack of short term visibility has made forecast beyond Q3 2023 more difficult. However, our business fundamentals remain unchanged. In the last few years, our revenue and customer base have expanded tremendously, particularly amongst Tier 1 accounts. We believe we've solidified our market share gains by delivering quality products and services.

Speaker 1

Additionally, we have a strong design win pipeline, Which positions us well for future growth. Here are a few highlights here are a few of our recent highlights. We have been designated a preferred supplier of multiple Tier 1 customers in automotive and telecom markets. We have started sampling silicon carbide power solutions for data centers and green energy conversion. We are also continuing development For EV Power Management Applications.

Speaker 1

We are continuing to broaden our customer base for AI applications And developing solutions for next generation platforms. We have new design wins in battery management solutions And USB PD for automotive, industrial and consumer applications. These will be major revenue drivers as we look ahead to 2024 2025. Moving now to a few comments on gross margin. GAAP gross margin was 56.1%, 120 basis points lower than the Q1 of 2023 and 2 60 basis points lower In the Q2 of 2022, our GAAP operating income was $112,300,000 Compared to $124,300,000 reported in the Q1 of 2023.

Speaker 1

Non GAAP gross margin for the Q2 of 2023 was 56.5%, Down 120 basis points from the gross margin reported in the Q1 of 2023. The quarter over quarter decrease in both GAAP and non GAAP gross margin is attributed largely to unfavorable variances and higher direct expenses. Our Q2 2023 non GAAP operating income was $153,100,000 Compared to $164,100,000 reported in the Q1 of 2023. Let's review our operating expenses. Our GAAP operating expenses were $135,400,000 in the Quarter of 2023 compared with $134,500,000 in the Q1 of 2023.

Speaker 1

Our non GAAP second quarter 2023 operating expenses were $96,000,000 matching what was reported in the Q1 2023. The difference between non GAAP operating expenses and GAAP operating expenses for the quarters discussed here are primarily Stock compensation expense and income or loss on an unfunded deferred compensation plan. For the Q2 of 2023, total stock compensation expense, including approximately $1,100,000 charged Cost of goods sold was $38,000,000 compared with $37,000,000 recorded in the Q1 of 2023. Switching to the bottom line. Q2 2023 GAAP net income was $99,500,000 or 2 point And $0.04 per fully diluted share, compared with $109,800,000 or $2.26 per share in the Q1 of 2023.

Speaker 1

2nd quarter 2023 non GAAP net income was $137,500,000 Or $2.82 per fully diluted share compared with $146,000,000 or $3 per fully diluted share in the Q1 of 2023. Fully diluted shares outstanding At the end of Q2 2023 were $48,800,000 Now let's look at balance sheet. Cash, cash equivalents and investments were $941,100,000 at the end of the Q2 of 2023 Compared to $919,100,000 at the end of the Q1 of 2023. For the quarter, MPS generated operating cash flow of approximately $90,200,000 compared with Q1 2023 operating cash flow Of $218,800,000 Accounts receivable ended the Q2 of 2023 At $169,200,000 representing 35 days of sales outstanding, which was 2 days lower than the 37 days reported at the end of the Q1 of 2023. Our internal inventories at the end of the Q2 of 2023 were $427,400,000 Down from the $430,800,000 at the end of the Q1 of 2023.

Speaker 1

Days of inventory of 201 days At the end of the Q2 of 2023, we're 3 days lower than at the end of the Q1 of 2023. Comparing current inventory levels with the following quarter's projected revenue, you can see days of inventory decrease To 184 days at the end of the Q2 of 2023 from 203 days at the end of the Q1 of 2023. I would now like to turn to our outlook for the Q3 of 2023. We are forecasting Q3 revenue in the range of $464,000,000 to $484,000,000 GAAP gross margin in the range of 55.5% to 56.1% Non GAAP gross margin in the range of 55.7% to 56.3%. Total stock based compensation expense In the range of $33,500,000 to $35,500,000 including approximately $1,000,000 That would be charged to cost of goods sold.

Speaker 1

GAAP operating expenses between $129,400,000 $133,400,000 non GAAP operating expenses in the range of $96,900,000 To $98,900,000 This estimate excludes stock compensation expense, but includes litigation expense. Interest and other income in the range of $3,000,000 to $3,400,000 before foreign exchange gains or losses. Fully diluted shares in the range of 48,600,000 to 49,000,000 shares. In conclusion, We continue to execute our long term strategy. I will now open the webinar for questions.

Operator

Thank you, Bernie. Analysts, I would now like to begin our Q and A session. As a reminder, if you would like to ask a question, Please click on the participants icon on the menu bar and then click the raise hand button. Our first question is from Ross Seymore of Deutsche Deutsche Bank, Ross, your line is now open.

Speaker 3

Thanks for letting me ask a question.

Speaker 4

Just wanted to ask Bernie first, when

Speaker 3

you had your general business condition update About orders remaining volatile, etcetera. I wonder if you could just give us a little more color. Are things kind of improving, staying the same? And is there any changes in things like Competitive intensity, pricing, geographic differences, any color, a little bit more detail than what you gave in your original preamble?

Speaker 1

Sure. I'd be glad to help out with that. So I think that we started that part of the conversation by acknowledging that in each of the last The prior three quarters that we believe that ordering patterns would oscillate. And that's pretty consistent when you're coming off of the Where there had been an extra normal level of ordering that created a demand supply imbalance that Afterwards, you're sort of draining your backlog as you are watching your customers try to align Around what they're guessing is end customer demand. So as a result of that, we have not had the same level of visibility out Past 90 to 120 days that we would have during the more normal ordering pattern.

Speaker 1

And so as a result of that, we don't have the same level of predictability. On the second half of your question, the one thing that remains consistent, whether it's under normal conditions or whether it's today, As we've always been in a very competitive marketplace, and obviously price downs are the norm And that we have competitors like ourselves that are trying to go after as much incremental business during this transitory period As is possible.

Speaker 2

Let me add it to We do see a slight improvement in the 1st quarters. And essentially it's similar. And We do see a consumer business improvement and From both from the U. S. Side to Asia side.

Speaker 2

And other ones pretty much stay the same.

Speaker 3

Great. Thanks for that. I guess as my follow-up, Bernie, you guys have had relatively volatile end markets, Not specific to you, but just in a general sense. So any sort of color in your guide for the Q3 between the various end markets? And the one I think People are most interested in, albeit still a relatively smaller part of your business, is your Enterprise Data segment.

Speaker 3

Any sort of color between the AI side you talked About last for the Q2 and the CPU side, which has been a little bit weaker.

Speaker 2

Yes. You really answered all your questions We don't see we are all the products related to with the Okay. We cannot ship enough now. And the other ones Other a part of enterprise data, like data centers, CPU powers, And these are still delayed.

Speaker 1

Yes. And one other thing to add and this is Specific to MPS and not necessarily broader comments at the general market, but automotive It came in a little bit lower than would have been expected. And as we look at the ramp in the second half, we're observing that At least for 2 of our customers, unit volumes appear to be lower, and we have 2 product launches, Which have been delayed into Q4 into Q1.

Speaker 5

Thanks, guys.

Speaker 2

Yeah.

Operator

Our next question is from Quinn Bolton of Needham. Quinn, your line is now open.

Speaker 6

Hey, Michael and Bernie. I Just wanted to ask on the GPU side of the business. There's been recent chatter in the market that One of your large customers may be bringing in Renasant as a second source as well as potentially Vicor. Just wondering if you might Share, any thoughts you have as you look forward with that customer about the impact of multi sourcing at that customer? And Maybe a related question.

Speaker 6

How are you feeling about your position looking into the next generation 3 nanometer processor at that customer? And then I've got a follow-up. Thanks.

Speaker 2

Okay. I think so far we're in the lead positions and I can we are engaged deeply in the future design And develop a new product for the second generations For the other the next generations. And so other than that, We can't speculate anything, so okay.

Speaker 1

I think in most Scenarios and this particular customer's representative is they want to take a leadership position through innovation, And they found us an equal partner for that. But it's in everybody's best interest that it be a competitive, not a single source. And so yes, we'd always anticipated that there would be redesigns that allow competition into the market.

Speaker 2

We have to provide the best solutions and at the same time we understand that our customers And that requires other solutions. This is a very large market. There's no means that NPS can supply everything in the market. And also NPS is always we emphasize diversified And if there's a performance need, I believe the NPS is the best solutions. Now and for the near future.

Speaker 6

Thank you, Michael. Bernie, you had mentioned sort of visibility out beyond 90 to 120 days is Pretty choppy at this point just given the industry dynamics. I guess I look after the Q4 and it looks like The Street has modeled the Q4 approximately Flat, which I think is an above seasonal pattern for MTS historically. And I'm just wondering, can you comment whether you think An above seasonal Q4 looks right to you, perhaps given the ramp in the GPU business and Some of the timing shifts you just mentioned in automotive or do you think it would be best for investors to think that the December quarter is going to see a Sort of a seasonal decline in the December quarter. Thank you.

Speaker 1

Yes. I think that normal seasonality For MPS, it would be somewhere between a sequential decline of between 4 percentage points and 5 percentage points. And I can point to the increase in the notebook sales during Q3, Which precedes Christmas, and that's a normal seasonal factor that's expected to come down. And we're not seeing the uplift that had been anticipated from automotive. So, I would

Speaker 5

be

Speaker 1

more comfortable with a seasonal down in Q4.

Speaker 2

Well, it's a you mentioned there's a seasonality we're talking about seasonality. And I try to figure out what is the seasonality now. And last year and we last couple of years, We have a very strong Q4, at least the year before that, okay. And customers see all these shortages, okay, I mean, and now and the Demand is clearly is much less. And so you have We experienced like year over year like in the last couple of years like over 40%.

Speaker 2

And this year And clearly it's not as much, okay, I mean, they're much less. And I can't really call it seasonality anymore. So it's Just as I said, it's not very clear, it's not Damien, but as Bernie said, usually in the seasonality we're lower.

Speaker 6

Understood. Thank you, Michael. Thank you, Bernie.

Operator

Our next question is from Rick Schafer of Oppenheimer. Rick, your line is now open.

Speaker 5

Thanks. Yes, guys, I just had

Speaker 7

a couple of questions, if I could. The first one is that if I could kind of Maybe revisit auto for a second. I mean, you mentioned power isolation module in your prepared remarks. And I don't know if you could Give us a little bit more color there, kind of an update on how many customers are evaluating the product now, talk about a little bit about if you could, Like design win timing, revenue timing kind of expectation there and is auto going to be the first Ramp and then data center and then more of the green stuff or how does it all kind of shake out I guess is what I'm asking?

Speaker 2

Yes, that's what we saw and delay a little bit, but we will Introduced to our resampling and announced, it was a delay due to technical issues. And so as I'm speaking now, we have a resample it. And Mostly in automotive and also data centers. And same as we mentioned earlier, the silicon carbides and these are products that we start to sample.

Speaker 7

Okay. Thanks, Michael. And then second question is, you guys have almost a $2,000,000,000 power management business now. And I think modules are on track to be 10% of that or so this year. And I think that's up from basically nothing just a couple of years ago.

Speaker 7

If this business sort of has, I believe Bernie I'm sure correct me, in light or better margins I think to core average and I think it's a 5x ASP multiplier. I'm just trying to get a sense of, Michael, how big do you envision this business You know becoming as a percent of mix going forward. And are there any in particular end markets that are going to be favored at least initially By the move into modules. Thanks.

Speaker 2

Yes. Okay. I believe that's our futures. And When customers want to have a plug and play solutions and they want less technically involved with power management And that module solution is the way to go. Again, people doesn't want to buy ICs and design all of these The components, okay.

Speaker 2

And initially, that's what we're ramping a lot of in the auto business and industrials, Again, industrial sites and as well as the telecom and Or even semi equipment. And a lot of marketing people Go on and on, okay, a lot of things to be mentioned. But Most of these products is not price sensitive and they are not Volume Consumer Related Product. And so this is still At the very beginning, we have all these customer base and we have all the new product coming out and We will see the similar growth rate in the next few years.

Speaker 4

Got it. Thanks, Michael.

Operator

Our next question is from Jeremy Kwan of Stifel. Jeremy, your line is now open.

Speaker 8

Thank you. Yes, this is Jeremy on for Tory. I guess maybe a first question on the comms business. It was down meaningfully as you guys Expected and we're probably one of the early ones to call out last quarter. I guess what's your sense of where things are now?

Speaker 8

Should we expect this business to kind of Sort of bounce along at these levels in the second half or maybe picking up next year. And what are your customers telling you in terms of their expectations?

Speaker 2

Yes. As you see, we didn't participate in 4 gs and 5 gs And other infrastructure business are new to us. And so you know what the 5 gs hasn't really ramped up quickly yet. But our products in a we have designed it in the last few years. We're just waiting for our customers to give us orders.

Speaker 2

And so far, it's not clear. Okay. Next question?

Operator

Our next question is from William Stein of Truist. William, your line is now open.

Speaker 4

Hey, there we go. Thanks for taking my questions. First, I'm hoping you can talk to us about channel inventory. When we look at your P and L, you had Nearly 50% revenue growth last year. I think there's a lot of there's a pretty strong sense among investors that there might be Some inventory still in the channel to be worked through.

Speaker 4

We'd love to hear any update or any measurement you have of that.

Speaker 1

Sure. So as far as what we observed in Q2 is that there was a meaningful decrease in channel inventories, Both in terms of dollars and days. And the sort of phenomena that we've seen has been a time delay between When the end customer places an order and when they want to do a pullback because of uncertainty with what end customer demand has been. So I can point to a couple of our end markets where that was very clear. But we believe right now that we're in a position to continue to bring To normalize channel inventories over the next two quarters.

Speaker 4

So not normalized yet, so is what it sounds like. So in the September For guidance, I assume there's some expectation that sell in will be lower than sell through. Is that fair?

Speaker 1

Yes. Again, going back to the comments about the visibility and predictability Out past 90, 120 days, that's not just the demand that the new net orders that we're receiving, But also the strength of the sell through is also a little harder to predict.

Speaker 4

Great. Thank you.

Operator

Our next question is from Matt Ramsay of Cowen. Matt, your line is now open.

Speaker 5

Thank you very much. Michael Burney, can

Speaker 2

you guys hear me out there?

Speaker 5

Yes. Awesome. So, I guess for my first question, Michael, we've you and I have had some conversations about The Company strategically wanting to sort of rebuild The consumer business as a percentage of revenue over time and get it back to a higher level than it's been now. I guess, I'd like to revisit some of those conversations and just see if you had any comments about how you feel about Supply, demand environment and the competitive environment in order to try to push To sort of reemphasize your company in certain parts strategically of that consumer segment. Thank you.

Speaker 2

Yes. So that's a good question. So we see some improvement, but this At the beginning. And as we see our supply, the cost And it went down dramatically. And then as Bernie said, our inventory values It will reflect inventory value now.

Speaker 2

And so in the past, NPS named the price killers, okay. It's a very simple game, okay. We don't mind And we don't buy in the consumer segments and I think we have a fight. And all the high gross margins It's on the other segments and it's all because We provide a much better, a much smaller size. And in consumer segments in the last Couple of years, we neglected that and because we don't have enough revenues or enough capacities.

Speaker 2

And so it's not that difficult to go back to the same games that we played in the

Speaker 5

Thanks, Michael. I think as my follow-up Question. I wanted to really focus on the Enterprise Data segment just because that's where A large percentage of my investor questions come from. And I think there's 2 dynamics going on here, right? The strength of the AI business with your lead customer there and some softness in And so the question is really what would you guys I think have built On books inventory to support ramps of all the customers in that space.

Speaker 5

So I guess the question is how quickly and what would the lead respond to an uptick in demand? And do you have any visibility into the timing of Potential reacceleration of that segment and how long is that visibility? Thanks.

Speaker 2

Our visibility is okay, probably is a well Okay. If you listen to all these major AI supply, you will see NPS, okay? And you will see the NPS And the next few quarters of potentials, okay. And But I can talk to you about the technical issues, okay. I think the NPS is so far the solutions is far better than Our competitor.

Speaker 2

So we in a for the next generation of AI processor, we're now working on now. So, okay, we're working A year ago, even 18 months ago. And so the relationship is Zhuang and also for the technical reason even more challenging and The space is critical and you have to radiate all the heat out. And For the next generations, power even higher. And so we provide all these vertical Solutions and we pioneer with it and you all the other solution had to fit Into the form factors.

Speaker 2

And the integrated solution is the only way to go.

Speaker 1

And I think if I could just add to that, it's also the breadth of the customer opportunities that we're engaged with. And over the course of the next four quarters, we're going to see multiple new customer applications launch Initially with MPS. So, yes, we have a very powerful initial position with one customer, But we expect to branch that out very quickly. There's multiple customers.

Speaker 5

Thank you, guys. Really appreciate it.

Operator

Our next question is from Hans Mosesmann of Rosenblatt. Hans, your line is now open. Our next question is from Jeremy Kwan of Stifel. Jeremy, your line is now open.

Speaker 8

Yes. Hi. Thank you for allowing me to follow-up here. I guess, I wanted to ask about capacity. You guys have always been very ahead of the curve on long term capacity and through up and down cycles.

Speaker 8

I was wondering how you're thinking about it in this environment and whether or not that may give you guys a competitive advantage in some of these Applications that you're really targeting, and also if you have a CapEx number for this quarter? Thank you.

Speaker 2

Yes. As we stated earlier, many of our customers requested Move out of China. And now we kind of achieved more than 50%. We can have more than 50% of the So the overall capacities, we don't have it, Pardon, Nelson. Okay, we have more inventories now, and we want to sell more from Our inventory.

Speaker 2

And does that answer your questions? Okay.

Speaker 1

Yes. And I think that when you look at capacity today, it's really when this environment Turns around and becomes more predictable, how are we positioned to service our customers a year 2 years from now. And I think the investments that we're making, Both in terms of expanding capacity and diversifying it geographically, both on the front end and the back end, We'll pay very good dividends as far as customer satisfaction.

Operator

Our next question is from Chris Caso of Wolfe. Chris, your line is now open.

Speaker 4

Yes. Thank you. Good evening. The first question is regarding order visibility. And I ask because for the past several quarters, there really hasn't been any requirement for turns business going forward.

Speaker 4

Is that something that's changing going forward, given some of the changes in the end markets? And what does that mean with regard to revenue visibility as we look at it over the next few quarters?

Speaker 1

Sure. I think that responded to this pretty nicely in that we saw some improvement in Q2 from Q1 As far as our net bookings, but it's still not to the degree that We historically enjoyed in either 2018 or 2020 just to pick 2 more recent years. In the past, we would have up to 90%, 95% of our next quarter's revenue in hand At the end of the preceding quarter, and so you're only relying on a fraction of a percent in order to of Tern's business In order to accomplish the numbers for that particular quarter. So we're seeing steady improvement, but we're Still not at the level yet where we have that predictability.

Speaker 4

Got it. Thank you. As a follow-up, I just had a follow-up question about supply and I understand that supply is getting a bit easier out there. Historically, I think your ability to procure supply from your competitors Has been a source of competitive advantage for monolithic power. How do you see the landscape going forward?

Speaker 4

I know you're bringing on some different foundry partners As you try to diversify outside of China, what do you think that means for both your access to wafers over the long term As well as the pricing, do you think that competitive advantage remains?

Speaker 2

Well, you mentioned the pricing. So, okay, of course, all these material costs It's much lower than or go back to normal, I should say, in the as of pre pandemics. And so in terms of capacities, look, I didn't mention earlier, and okay, we want to Out of China, that's from our customers' request. And the other one is we want to expand it because Just for our next couple of years growth and mostly we are still in Follow our long term plan and we invest, okay, of course, now we should slow down a little bit, Okay, in the next few quarters. And but over the long term, we should spend we should Continue the

Speaker 7

course. Thank you.

Operator

As there are no further questions, I would like to turn the webinar back over to Bertie.

Speaker 1

Thanks again, Jen. I'd like to thank you all for joining us for this webinar and look forward to talking to you again during our Q3 webinar, which will likely be at the end of October. Thank you and have a nice day.

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