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 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star 0. I would now like to hand the conference over to your speaker today, Monolithic's CFO, Bernie Plagan. 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. Risks, 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 10-K, filed on March 1, 2019, and Form 10-Q, filed on November 1st, 2019, both of which are accessible through our website, www.monolithicpower.com. NPS 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 GAAP financial measures 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 7.8% 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 technology. system solutions using QSMOD technologies for GPU-based artificial intelligence and machine learning applications. Introduced 48-volt QSMOD technology for both cloud-based and automotive applications. Coupled with our design wins in QSMOD and AI applications, MPS is at the early stage of this important revenue ramp. Won a major contract to support a Tier 1 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 shipments 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 upside. 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 VAB. 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%, in 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 18.9% increase primarily resulted from strong sales growth for cloud computing and high-end notebooks. Computing and storage revenue represented 30.1% of MPS's total revenue in 2019 compared with 27.3% 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 13.5% of our 2019 revenue compared with 12.1% 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 14.4 percent of MPS's full-year 2019 revenue compared with 13.8 percent 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 15.8% of MPS's full-year 2019 revenue, compared with 15.2% 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 26.2% of MPS's full-year 2019 revenue, compared with 31.6% in 2018. Switching to Q4, MPS had a record fourth quarter with revenue of $166.7 million, 1.2% lower than revenue generated in the third quarter of 2019, but 8.6% higher than the comparable quarter of 2018. By market segment, revenue for computing and storage grew 27.8% year over year. Automotive grew 8.6%, and communications grew 8.5%. Industrial was essentially even with Q4 2018, while consumer revenue fell 5.7% from the prior year. Fourth quarter 2019 gap gross margin was 55.1%, 10 basis points lower than third quarter of 2019, but even with margin reported in the fourth quarter of 2018. Our GAAP 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-GAAP gross margin was 55.5 percent, 10 basis points lower than both the third quarter of 2019 and the fourth quarter of 2018. Our non-GAAP 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 GAAP 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-GAAP fourth quarter 2019 operating expenses were $41.8 million. Down from the $42.5 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 the GAAP and on GAAP 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 GAAP and non-GAAP 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 of 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-GAAP 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 31st, 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 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 MPFs 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 range of $161 to $167 million. We also expect the following. Gap gross margin in the range of 55.1 to 55.7 percent. Non-gap 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 of goods 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 should 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 percent 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 market share. I will now open the phone lines for questions.

Thank you. 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. And our first question comes from Jeremy Kwan with Stiefel Nicholas. Your line is open.