Monolithic Power Systems, Inc.

Ladies and gentlemen, thank you for standing by and welcome to Monolithic Power Systems fourth quarter 2019 earnings conference call. At this time all participants' lines are in a listen-only mode. After the speaker's presentation there will be a question and answer session. To ask a question during this session you will need to press star one on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance please press star zero. I would now like to hand the conference over to your speaker today, Monolithic's CFO Bernie Blakent. Please go ahead sir.

Thank you very much. Good afternoon and welcome to the fourth quarter 2019 Monolithic Power Systems conference call. I'm joined today by Michael Singh, Monolithic's CEO and founder. In the course of today's conference call 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. Risk, uncertainties and other factors that could cause actual results to differ are identified in the Safe Harbor Statements contained in the Q4 earnings release and in our SEC filings including our Form 10K filed on March 1st 2019 and Form 10Q filed on November 1st 2019 both of which are accessible through our website .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. The table that outlines the reconciliation between the non-GAAP financial measures to is included in our earnings release which we have filed with the SEC. I would refer investors to the Q4 2018, Q3 2019 and Q4 2019 earnings releases as well as to the reconciling tables that are posted on our website. I'd also like to remind you that today's conference call is being webcast live over the internet and will be available for replay on our website for one year along with earnings release filed with the SEC earlier today. For the full year 2019, MPS achieved record revenue of $627.9 million, growing .8% from the prior year while our industry segment experienced a significant downturn. As always, we executed our strategies consistently. In recent years, especially in 2019, more and more first tier companies recognized MPS's superior technologies as well as our product quality and our excellent customer support. We see a lot more high quality growth opportunities ahead of us. Our objective is to successfully manage our expenses to support our growth which will in turn benefit our shareholders in both the long and short term. Here are a few highlights which we achieved in 2019. Introduced leading edge system solutions using QS mod technologies for GPU based artificial intelligence and machine learning applications. Introduced 48 volt QS mod technology for both cloud based and automotive applications. Coupled with our design wins in QS mod and AI applications, MPS is at the early stage of this important revenue ramp. Won a major contract to support a tier one automotive supplier which will begin generating revenue in the next two to three years. Successfully co-developed cutting edge solutions for smart driving systems and lighting applications. Began volume shipment of high current programmable power modules for communication applications such as 5G networks. Entered the high performance analog market with the formation of a high precision data acquisition business group. With input from our customers, we have completed the detailed product specifications. We expect to release these products in 2020. The initial revenue ramp is expected to begin in 2021. The rollout of these advanced products will mark MPS's introduction into the highly profitable high speed precision data acquisition market segment. We understand the road to success may not be smooth, however we believe our commitment will pay off in the long term and our shareholders will be pleased with the results of these efforts in the coming years. Let's go through lowlights. Well, we really don't have any, except there is one item worth pointing out. We deliberately reduced our inventory in Q3 and Q4 2019, which in hindsight was not necessary. As a result, our current inventory level is too low for MPS to maximize our growth in the next few months. Although we can still keep up our growth rate as in the past, we unfortunately may not be able to take full advantage of all the potential upsides. In order to fulfill customers' demands in the second half of 2020, we now have to commit tremendous effort in order to accelerate our schedule to bring up a second 12 inch fab. This has created an unnecessary hardship for our team. Turning back to our full year 2019 revenue by market segment compared with 2018, communications revenue up 20.1%, computing and storage up 18.9%, automotive up 12.8%, industrial up 12.3%, consumer revenue was down 10.8%. Full year 2019 computing and storage revenue grew $30.1 million over the prior year to $189.2 million. This .9% increase primarily resulted from strong sales growth for cloud computing and high-end notebooks. Computing and storage revenue represented .1% of MPS' total revenue in 2019 compared with .3% in 2018. Communications revenue grew $14.2 million to $84.8 million. This improvement was primarily due to initial ramping of 5G infrastructure sales. Communications revenue represented .5% of our 2019 revenue compared with .1% in 2018. Automotive revenue grew $10.2 million to $90.3 million in 2019. This growth primarily represented increased sales of infotainment, safety and connectivity application products. Automotive revenue represented .4% of MPS' full year 2019 revenue compared with .8% in 2018. Industrial revenue grew $10.9 million to $99.4 million in 2019. This growth reflected sales for applications in power sources, security and industrial meters. Industrial revenue represented .8% of MPS' full year 2019 revenue compared with .2% in 2018. Consumer revenue fell $19.9 million to $164.2 million. With the exception of home appliances and wearables, all major consumer markets decreased between years. Consumer revenue represented .2% of MPS' full year 2019 revenue compared with .6% in 2018. Switching to Q4, MPS had a record fourth quarter with revenue of $166.7 million, .2% lower than revenue generated in the third quarter of 2019, but .6% higher than the comparable quarter of 2018. By market segment, revenue for computing and storage grew .8% year over year. Automotive grew .6% and communications grew 8.5%. Industrial was essentially even with Q4 2018, while consumer revenue fell .7% from the prior year. Fourth quarter 2019 gap gross margin was 55.1%, 10 basis points lower than third quarter 2019, but even with margin reported in the fourth quarter of 2018. Our gap operating income was $30.7 million compared to $30.0 million reported in the third quarter of 2019 and $33.1 million reported in the fourth quarter of 2018. Fourth quarter 2019 non-gap gross margin was 55.5%. 10 basis points lower than both the third quarter of 2019 and the fourth quarter of 2018. Our non-gap operating income was $50.8 million compared to $51.4 million reported in the prior quarter and $46.6 million reported in the fourth quarter of 2018. Let's review our operating expenses. Our gap operating expenses were $61.2 million in the fourth quarter compared with $63.1 million in the third quarter of 2019 and $51.5 million in the fourth quarter of 2018. Our non-gap fourth quarter 2019 operating expenses were $41.8 million, down from the $32.5 million we spent in the third quarter of 2019, but up from the $38.7 million reported in the fourth quarter of 2018. On both a gap and an on-gap basis, fourth quarter 2019 litigation expenses were $991,000 compared with a $692,000 expense in Q3 2019 and a $409,000 expense in Q4 2018. The differences between gap and non-gap operating expenses for the quarters discussed here are stock compensation and income or loss from an unfunded deferred comp plan. Fourth quarter 2019 stock compensation expense, including $574,000 charged cost of goods sold, was $18.7 million compared with $21.3 million recorded in the third quarter of 2019. Switching to the bottom line, fourth quarter 2019 gap net income was $32.4 million or $0.70 per fully diluted share compared with $0.64 per share in the third quarter of 2019 and $0.61 per share in the fourth quarter of 2018. Q4 2019 non-gap net income was $48.4 million or $1.04 per fully diluted share compared with $1.08 per share in the third quarter of 2019 and $0.99 per share in the fourth quarter of 2018. Fully diluted shares outstanding at the end of Q4 2019 were $46.5 million. Now let's look at the balance sheet. As of December 31, 2019 cash, cash equivalents and investments totaled $458.5 million compared to $422.0 million at the end of the third quarter of 2019. For the quarter, MPS generated operating cash flow of about $61.0 million compared with Q3 2019 operating cash flow of $72.4 million. Fourth quarter 2019 capital spending totaled $8.7 million. Accounts receivable ended the fourth quarter of 2019 at $52.7 million or 29 days of sales outstanding compared with the $58.3 million or 31 days reported at the end of the third quarter of 2019 and the $55.2 million or 33 days reported in the fourth quarter of 2018. Our internal inventories at the end of the fourth quarter of 2019 were $127.5 million down from the $135.6 million at the end of the third quarter of 2019. Days of inventory fell to 155 days at the end of Q4 2019 from the 163 days at the end of the third quarter of 2019. Before turning to our outlook for Q1 2020, I would like to remind everybody of our long-term non-GAAP financial model which has been largely unchanged for the past five years. First, we target to grow revenue at a rate that is 10 to 15 percentage points greater than our peers. In a year where the market is expected to grow between 5 to 8 percentage points, we believe that MPS should be able to grow annual revenue from 15 to 20 percent. Second, we target quarterly gross margin to grow by 10 to 20 basis points sequentially. Third, to ensure continued growth, we target increases in our R&D and SG&A investment at 50 to 60 percent of the annual revenue growth rate. Finally, we expect to return 30 to 40 percent of the company's annual free cash flow to shareholders. This long-term financial model is an important tool in setting expectations for accelerated revenue growth and providing operating leverage while allowing for a proper level of business reinvestment. I would now like to turn to our Q1 2020 outlook. We are forecasting Q1 2020 revenue in the next five years. We also expect the following. GAAP gross margin in the range of 55.1 to 55.7 percent. Non-GAAP gross margin in the range of 55.4 to 56.0 percent. Total stock-based compensation expense of $18 to $20 million, including approximately $600,000 that would be charged to cost a good sold. GAAP R&D and SG&A expenses between $58.4 and $62.4 million. Non-GAAP R&D and SG&A expenses to be in the range of $41.0 to $43.0 million. This estimate excludes stock compensation and litigation expenses. Litigation expenses to be in the range of $1.5 to $2.5 million as MPS prepares for an upcoming trial which is set to begin at the end of March. Interest income is expected to range from $1.5 to $1.7 million before foreign exchange gains or losses. Fully diluted shares to be in the range of 46.2 to 47.2 million shares. Finally, we are pleased to announce a 25% increase in our quarterly dividend to 50 cents per share from 40 cents per share for shareholders of record as of March 31, 2020. In conclusion, we will continue executing on our strategy and winning markets here. I will now open the phone lines for questions.

As a reminder, if you would like to ask a question, press star 1 on your telephone. To withdraw your question, press the pound key. Our first question comes from Jeremy Kwan with Steve O'Niglus. Your line is open.

Yes, good afternoon and congrats on the strong results in Outlook, especially in a challenging environment. I guess my first question regarding, you mentioned about not having sufficient inventory and hand to meet all the immediate demand you're seeing. Is there a way you can kind of quantify what's kind of being left on the table and is there a chance to capture this maybe later on in the coming quarters?

All these products we just designed and aimed and our customers have a very good understanding of the upside. Many of them, they told us. We believe that these are, these sockets are difficult to change and they're not changing. It can change month by month and those volumes still will be with us.

Yeah, we're not trying to identify a risk factor with regard to our ability to execute against expectations. We're just saying that it would be imprudent for us to allow our investors to believe that there's even more upside beyond that because we may have some constraints with regard to inventory.

Our inventory, we involve a few thousand products and very difficult to predict which one is the ramp first. That causes a lot of problems for our planning and also for our shipments. We're now doing partial shipment.

Great. Thank you very much. That's helpful clarity. I guess my follow-up would be, Bernie, you mentioned entering the high-performance analog market with the high-precision data acquisition group. Can you give us more details about this? Maybe you or Michael, maybe what initial applications are you going to go after first and how you plan to compete in this market and maybe your sales strategy? Do you need more distribution partners or is this something that you can leverage your e-commerce platform? Thank you.

The initial market segment, they are in the communications as well as medical applications. We don't have a long-term strategy through our e-commerce. We try to push everything through e-commerce.

Great. Thank you very much.

Thank you. Our next question comes from Alexandra Vici with William Blair. Your line is open.

Great. Thanks. Congratulations on a wonderful quarter. Just on 48Vault, you talked about the new product introductions in 2019. I believe you guys said on the last earnings call that you'd be seeing some revenue in Q1. Can you just update us on that and how we should think about the total revenue opportunity there as we look into 2020 and 2021?

I don't think that we guided per se on giving an exact revenue outlook for Q1 with beginning of 48V, but we said that it would be in 2020. Right now, everything is tracking pretty much along our expectations. What's really exciting is that I think that it validates our strategy to have gone into 48V and to enjoy and participate in many of the opportunities that it brings us.

Okay. That's helpful. I apologize as if I missed it, but Bernie, did you give us a little bit of clarity in terms of by segmenting Q1, what segments maybe you thought would be the strongest sequentially?

Yeah. Again, I think the broader question there is what's going to be the revenue drivers looking like. At this point, I think it's a continuation of more of what we've been seeing recently. For example, the compute and storage market is very well positioned for growth in the early part of the year. Likewise, communication, we believe that there's also a significant opportunity for growth, particularly in Q1. When you look at ... I should make one asterisk on computing. Notebooks, which we report in computing, are seasonal. Coming out of Q4, they tend to have a seasonal decline, which we are anticipating as well. When you look at storage or cloud computing, I think that we're very well positioned. Then after that, if you look at consumer, again, that still has not hit a steady state or shown any signs of being healthy. Again, consumer is also very seasonal. It's normal to expect a decline from Q4 to Q1. When you look at industrial, a lot of that was revenue performance, particularly in the second half of the year, reflected inventory builds on the part of certain of our customers who are anticipating trade restrictions. That area may fall off in Q1. Automotive, that tends to go either on the plateau or when it gets designed in the new revenue opportunity, there's a spike.

Okay. Just on automotive, some other semiconductor companies have alluded to a bottoming out improvement there. Are you seeing a similar situation? I know it depends on what model you're designed into and whatnot, but do you feel like the worst is behind you?

I think we are too small to call the industry. We're growing to all these greenfield markets and the least things we say that this is the end of the world, or this is the beginning of the world. It's the beginning of the world for NPS.

Understood. That's it for me. Thank you so much.

Thanks, Alex.

Thank you. Our next question comes from Michelle Waller with Needham. Your line is open. Hi, guys.

Thanks for taking the question and congrats on the results. I guess the first one for me is in terms of the next generation gaming consoles launching in 2020, could you guys walk us through what the ramp is expected to look like for NPS? Is it only a back half driver or do you think you'll see some meaningful uptake into QQ and from a gross margin perspective, how should we think about the impact to corporate gross margins during that ramp?

Are you talking about gaming particularly? Yeah,

specifically.

Gaming is not a major part of our business and that is all linked into the one product is in the consumer segment and it is in the share, the specific part of the consumer segment and it's a similar CPU core power. So the business is very limpy but we treat this very opportunistically and our customers really like our solutions and we will support them when the demands come.

We would probably expect to see a similar ramp as we did in 2017.

Okay, that's helpful. And then for my follow-up, you guys mentioned previously that your dollar content opportunity with the Whitley server platform increased to $70 from $50 in the early platform. I'm just trying to figure out, I know this is a bit further off but with the EqualStream platform that's expected to launch in 2021, how do you guys see your dollar content opportunity changing generation over generation or just any color you can get there would be helpful?

On the dollar content, we haven't seen an opportunity to expand beyond what we currently are getting on the V14 but then again the specs are not entirely finalized so if it turns out that the space of the power requirements are materially different from what the V14 is, there might be an opportunity for pricing leverage.

Okay, thank you. That's all for me.

Thank you.

Thank you. And our next question comes from Matt Ramsey with Cowen. Your line is open.

Hey guys, this is Josh Buckhalter on behalf of Matt. Thanks for taking my questions and congrats on the results in a tough environment. I guess the first question was, you know, if you think about your inventory commentary from last quarter, are there any, you know, coupled items in particular that you could point to that drove the change in your thought process from 3Q to 4Q? And then also, is there any margin impact from bringing on the new 12-inch fab and your sort of what sounds like capacity constraints?

Well, talking about margins and newer 12-inch fabs, okay, every time we bring up a fab, and we won't have a very immediate impact for the margin improvement. These are products from the newer fabs always a year or two years down the road. In terms of which segments of our inventory is patterned, it's actually cross the board.

Got it. Thank you. And I guess in the beginning of the call, you mentioned several tier one companies launching with your design wins. Were there any, you know, I guess if you could rank order one or two that you're most excited about heading into 2020? Thank you and congrats again.

These are ways that Bernie said at the beginning of the call. These are the few things that we achieved in 2019. All of these will generate a significant impact on the future of our business and revenue in 2020.

Yeah, and it's not restricted to any one end market segment. It's actually very broad-based the level of customer engagement that we're receiving from tier ones. Thanks, guys.

Thank you. And our next question comes from Rick Schaefer with Oppenheimer. Your line is open.

Yeah, hi, guys. I'll echo everyone else's congratulations on another monolithic quarter, another great quarter. So good job. I just had maybe a question. On coronavirus, since it's a topic du jour, you guys have three of your four production foundries in China. So I'm just curious, you know, Michael or Bernie, if you're seeing any signs of supply disruption or do you expect to see any signs, you know, once guys just start coming back to work next week?

All the five as far as we know, they are all open. They are all operating. And they are in really tight conditions, okay. And all the assemblies, same things. And so far, we have seen no signs of supply disruption. And it really hasn't disrupted our supply.

And again, Rick, it's a very early stage to really fully appreciate or understand how any of our businesses will be impacted.

Sure. Sure, I understand. So maybe a follow-up, if I could. Just on your auto biz, I know you guys secured one of the, I think the number one tier one auto supplier a few months ago. I'm just curious where we stand on securing the number two tier one auto supplier, you know. And as part of your answer, I'm curious, I mean, from after you signed number one, you know, have you seen, is it too soon to have seen any noticeable uptick in design activity? And maybe also just a comment on China in general. I know that I'd be interested. I know it was kind of a slow year for China Auto. They basically canceled the design year, I think, last year, or the model year. I'm curious, you know, kind of what your expectations are for China this year, what you're seeing. Thanks.

Well, okay. Overall, everybody told us, okay, the autos will not be a good year. But from the NPS side, we're looking pretty good for 2020. And all these number one, number two, number three, all those, we are deeply engaged and we see all the activities that we, the more than we can handle. And now we have to pick and choose.

Got it. Thanks, Michael.

Thank you. And our next question comes from Ross Seymour with Deutsche Bank. Your line is open.

Hi, guys. This is Melissa on behalf of Ross. Congratulations on the really solid quarter. I know you guys don't guide out more than one quarter. But I guess from a high level perspective, now that we're coming out of this industry downturn, what are your expectations for returning to either seasonal or even above seasonal growth? Is this moderated by what, by your inventory constraints? And how are you thinking about the flip of the recovery from here?

Well, you call the industrials out of the downturn, okay? And as you said, Bernie said earlier, we will grow above the industrial market, okay, plus what's your upturn in about 10, 15 to 20 percent. So we committed on that.

Okay, great. And then does the inventory constraints, is that kind of restricting that growth prospect, or do you think you can still kind of hit that target?

We tried to, and as we said earlier, we cannot maximize it because our customers are pulling the requirements, okay? And so we have to keep them lined up and we have to partially ship them. And our inventory is in a very low stage, okay?

Got it. And then the last one for me is your computing and storage segment has been driving really strong growth. And I was just curious, when you look into 2020, how are you thinking about the shape of that business? And in particular, are you worried about any risk of inventory digestion of lumpy buying, or do you think that it's really strong secular growth that's driving the strengths?

Yeah, when you look at 2019, I think that first half of the year was an anomaly where the hyperscales were trying to digest excess capacity. And so I would see with the V14 having been just recently rolled out, a return to a more normalized adoption process.

Okay, great. Thank you guys.

Thank you. As a reminder, if you would like to ask a question, press star one on your touchtone telephone. And our next question comes from Tori Svenberg with Steefo. Your line is open.

Yes, thank you and congratulations again. Very nice results. First question on inventory has been tight. I mean, you're at 156 days. So, how tight is it? I mean, I know you want to run a little bit higher than that, but it doesn't seem alarmingly low either. So, maybe you could just elaborate a little bit on that.

I think we're at 155 days right now. And if you were to look at sort of the industry standards, you know, we're probably in and about the midpoint range of what people might expect. There's two things though that differentiate us. The first is the diversity of the number of products that we maintain. And then the second is that we build inventories ahead of when we sell them. And as a result, because we're growing at a rate that is 10 to 15 percentage points faster than the industry, that puts more pressure on us to have more inventory available at an earlier stage. So, it's as much a risk management decision with the level we carry. And I think that we've said previously that we're more comfortable with inventory levels between about 160 and 180 days.

For the stagnant companies, inventory, yes, is very predictable. For the high-end companies, for the growth company, and we have a particular for NPS, we have, if not thousands, we have hundreds of projects and they are taking off. And some of them are faster, other ones are slower. How do we pick on those? Very difficult to call.

Well, it's a good problem to have. Second question, and I always ask this, is that the website keeps changing. So, if you could update on that, that would be great.

Thanks. The e-commerce side, other than the NPS website, e-commerce, we're still learning from that. But our product is still to the third party's e-commerce side doing really well. So, as a result of learning and we're changing it, you see that. You see that on our website. And so far we can't give you the significant number yet, but I feel that the end of 2020, I think that we'll move some needles.

Great, so at least you're now seeing the traffic really moving in the right direction, sounds like. Yes,

the key is the traffic. The key is the traffic. So we can, again, give you an analogy of we believe back in a year ago, we believe that there's a lot of fish in the Pacific Ocean. So we dropped the fish in the middle of the Pacific Ocean. We didn't come to anything. And now we're learning, we're fishing what kind of fish. Where are they? We're not long more targeted. So we went through, we have gone through the face, we're not long more targeted now.

Very good. Make sure you have enough bait. Last question on the e-motion business, if you could also update us there, including obviously your system level motor products.

Yes. So the model is that the intended is just not selling a model. And intended as a provide a convening for our customers. For the initial ramp. So like we, those business at the very beginnings and it goes through, we see quite a few orders from our internet. And then typically those customers are going very slow. And I mean, their project takes a year and a year and a half. And it's not like to ramp. It's not like they're selling a silicon pieces. And usually a model, it takes about three or four years. And in terms of e-motions, we have, I don't know what the, Bernie, maybe you can say that, okay, it was 20 some million dollars this year, more than last year, $27 million. This year we're going to keep up a similar growth rate. And so it will be, certainly it will be a 30 or 40 million dollars. I

think that we're comfortable in saying that it can be a 30 or 40 million dollar business here in the next few years. I think though that Michael makes a very good point as far as the length of time between adoption and when you actually generate revenue. Many of those applications almost have characteristics similar to automotive.

Very good. Congratulations again. Thank you.

Thank you. And I'm showing no further questions at this time. I'd like to turn the call back to Bernie Blagen for any closing remarks.

Thank you. I'd like to thank you all for joining us for this conference call and look forward to talking to you again during our first quarter 2020 conference call, which will likely be in April. Thank you and have a nice day.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect. Everyone have a great day.