Power Integrations (POWI) $31.50 +0.70: After the close Thursday, Power Integrations published Q4 EPS of $0.16 on revenue of $32.291 (+10.6% Y/Y) vs. Reuters Research consensus at $0.17 on $35.41MM. Revenue came in below consensus due to lower than expected shipments into the cell phone market.
Revenue and EPS Guidance
Guided for Q1 EPS of $0.13-0.16 on $30.35-32.29MM (-6.0% to 0.0% Q/Q) vs. consensus at $0.16 on revenue of $35.4MM.
Guided for C04 EPS of $0.70-0.80 on $35.6-35.9B (+10.6-11.5% Y/Y) vs. consensus at $0.78 on $156.84MM.
Performance
Revenue and Cash Flow Analysis
Q4:02 (12/30/02) Q4:03 (12/30/03) % Change Y/Y Performance
Revenue (in millions) 29.198 32.291 10.6 Revenue increased 10.6% Y/Y on firm ASPs (average selling prices), and improving demand from the consumer, computer and industrial segments, partially offset by lower than expected demand from the communications market.
Communications revenue (36% of sales) declined 25% Q/Q due to lower than expected shipments into the cell phone market.
Consumer revenue (28% of sales) increased 83% Y/Y on a 130% and 71% Y/Y rise in shipments to set-top box and consumer appliances manufacturers.
Computer revenue (22% of sales) increased 19% Y/Y on a 75% Y/Y rise in shipments to LCD manufacturers.
Industrial revenue (8% of sales) increased over 100% Y/Y.
Product
28.874 31.783 10.1
License Fees and Royalties
0.324 0.508 56.8
Cost of Revenue 15.269 15.906 4.2
Gross Profit 13.929 16.385 17.6 Gross profit increased 17.6% Y/Y on manufacturing efficiencies.
Gross margin improved 190 bps Y/Y to 49.6% (excludes 110 bps benefit from purchase of buildings).
Operating Expense 9.245 9.280 0.4 Operating profit increased 51.7% Y/Y.
Operating profit margin improved 596 bps Y/Y to 22.0% as sales grew at a faster rate than manufacturing costs and operating expenses.
Operating expense increased 0.4% Y/Y.
Sales and marketing expense declined 1.6% Y/Y; improved as a percent of sales by 141 bps to 11.4%.
General and administrative expense increased 5.8% Y/Y; improved as a percent of sales by 24 bps Y/Y to 5.3%.
R&D expense increased 0.1% Y/Y; improved as a percent of sales by 127 bps Y/Y to 12.0%.
Sales and Marketing
3.734 3.673 (1.6)
General and Administrative
1.622 1.716 5.8
R&D
3.889 3.891 0.1
Operating Profit 4.684 7.105 51.7
Margins Analysis
Q4:02 (12/30/02) Q4:03 (12/30/03) bps Change Y/Y Performance
Gross Margin 47.7 50.7 304 Guided for Q1 gross margin of 48-49%.
Guided for C04 gross margin of 47-49%.
Operating Profit Margin 16.0 22.0 596
Sales and Marketing
12.8 11.4 (141)
General and Administrative
5.6 5.3 (24)
R&D
13.3 12.0 (127)
Valuation
Table I (Revenue Growth and Operating Margin Matrix) shows, on an inverted DCF/EVA basis, the revenue growth and corresponding operating margin the company must achieve each year for the eight years beginning in C06 in order for investors to justify owning shares at current valuation. Table I: Revenue Growth and Operating Margin Matrix.Revenue Growth* Operating Margin*
High 30% 25%
35% 30%
30% 35%
* Assumes aggressive balance sheet management and steady Y/Y improvement. On a price multiples basis, POWI trades at 6.2x C04E revenue of $154.11MM (+22.6% Y/Y) and 5.1x Reuters Research consensus C05E revenue of $187.20 (+21.5% Y/Y), and 42.0x C04E EPS of $0.75 and 31.5x C05E EPS of $1.00.
Summary
Revenue miss reflects management's limited visibility into the high turns (products booked and shipped in the same quarter) communications business. Overall, demand for POWI's ICs-based (integrated circuits) power conversion solutions is improving, driven by:
the need for energy efficient appliances and devices (mandated by global energy efficiency guidelines);
the need for compact and cost effective power conversion solutions (advances in appliance/device technology and design require transformers with smaller form factors); and
increases in the prices of iron and copper over the past year and manufacturing cost reductions at POWI.
The latter in particular makes the TinySwitch (2-20 watts) and TopSwitch (10-250 watts) product families price competitive alternatives to traditional transformers. As a result, POWI's power conversion solutions, led by the newer TinySwitch II and TopSwitch GX products, are poised to continue penetrating the consumer, computer and industrial markets. Additionally, the newest products, DPA-Switch and LinkSwitch (0-3 watts), are expected to ramp over the next several years. POWI is targeting several high volume opportunities within a current addressable market estimated at approximately $1.6B; production quantity shipments are beginning on two major design wins. We think POWI's addressable market opportunity will expand as manufacturers convert from older iron and copper technologies to ICs-based solutions, leading to sustained 20%+ revenue growth and operating margin above the rates implied by our inverted DCF/EVA model. However, shares fully reflect these growth and margins expectations despite the 10.5% pull-back since December 31, 2003. As a result, we would initiate a minor position at current level only for the aggressive growth portion of portfolios; prefer initiating on a 10-15% pull-back or until POWI delivers growth in the high teens to low 20% range.--Ping Yu, Briefing.com |
