Monolithic Power Systems, Inc.

Good day, ladies and gentlemen, and welcome to the Monolithic Power Systems First Quarter 2019 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. If anyone should require operator assistance, please press star, then zero on your touchtone telephone. As a reminder, this call is being recorded. I would now like to introduce your host for today's conference, Bernie Blegan, Chief Financial Officer. Please go ahead.

Thank you very much. Good afternoon, and welcome to the first quarter 2019 Monolithic Power Systems Conference Call. Michael Singh, CEO and founder of MPS, is with me on today's call. 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 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 Q1 earnings release and in our SEC filings, including our Form 10-K filed on March 1, 2019, which is 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. A 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 Q1 2018, Q4 2018, and Q1 2019 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 the earnings release filed with the SEC earlier today. NPS had another record first quarter with revenue of $141.4 million, 9.5 percent higher than the comparable quarter in 2018. NPS continues to benefit from our technology leadership and diversified multi-market strategy. Looking at our revenue by market, First quarter 2019 communications revenue of $22.2 million rose $6.4 million or 40.8% from the first quarter of 2018. Communications revenue represented 15.7% of MPS's first quarter 2019 revenue compared with 12.2% in the first quarter of 2018. The year-over-year increase primarily reflected initial 5G networking sales as well as higher sales in the residential gateway and router market. First quarter 2019 industrial revenue of $21.3 million increased 21.6% from the first quarter of 2018 and accounted for 15.1% of our total first quarter revenue, up from 13.6% in the first quarter of 2018. The increase over the first quarter of 2018 primarily reflected gains in power sources and security applications. First quarter 2019 automotive revenue of $20.5 million grew 15.7 percent over the same period of 2018 and represented 14.5 percent of MPS's first quarter 2019 revenue versus 13.7 percent in the same period of 2018. This growth primarily represented increased sales of infotainment, safety, and connectivity application products. In our computing and storage market, revenue of $39.2 million increased $8.2 million, or 26.5% year-over-year. First quarter 2019 computing and storage revenue represented 27.7% of MPS's first quarter 2019 revenue compared with 24.0% in the first quarter of 2018. The year-over-year revenue increase primarily reflected sales growth for notebooks and servers. Compared with the first quarter of 2018, revenue from consumer markets decreased $9 million, or 19.1 percent. The year-over-year revenue decrease reflected across-the-board reductions in traditional consumer markets. Consumer revenue of $38.1 million represented 27.0 percent of our Q1 revenue compared with a 36.5 percent contribution in the first quarter of 2018. GAAP gross margin was 55.2 percent, 10 basis points higher than the fourth quarter of 2018 and 20 basis points lower than the first quarter of 2018. Our GAAP operating income was $21.7 million compared with $22.0 million reported in the first quarter of 2018. For the first quarter of 2019, non-GAAP gross margin was 55.6 percent, matching the fourth quarter of 2018, but 30 basis points lower than the first quarter of 2018. Our non-GAAP operating income was $39.6 million compared to $37.2 million reported in the first quarter of 2018. Let's review our operating expenses. Our GAAP operating expenses were $56.3 million in the first quarter of 2019, compared with $49.5 million in the first quarter of 2018. Our non-GAAP first quarter 2019 operating expenses were $39.0 million, up from the $35.0 million reported in the first quarter of 2018. The differences between non-GAAP operating expenses and gap operating expenses for the quarters discussed here are stock compensation expense and income or loss on unfunded deferred compensation plan. For the first quarter of 2019, total stock compensation expense, including approximately $531,000 charged cost of goods sold, was $16.0 million, compared with $15.0 million recorded in the first quarter of 2018. Switching to the bottom line, First quarter 2019 GAAP net income was $26.2 million or 58 cents per fully diluted share compared with $21.9 million or 49 cents per share in the first quarter of 2018. First quarter 2019 non-GAAP net income was $37.9 million or 84 cents per fully diluted share compared with $35.0 million or 79 cents per fully diluted share in the first quarter of 2018. Fully diluted shares outstanding at the end of Q1 2019 were $45.2 million. Now let's look at the balance sheet. Cash equivalents and investments were $362.3 million at the end of the first quarter of 2019 compared to $380.5 million at the end of the fourth quarter of 2018. For the quarter, MPS generated operating cash flow of about $38.8 million, compared with operating cash flow of $16.3 million in the first quarter of 2018. First quarter of 2019 capital spending totaled $59.4 million. Accounts receivable ended the first quarter of 2019 at $58.9 million, or 38 days of sales outstanding, up five days from 33 days at the end of the fourth quarter of 2018 and four days higher than the 34 days posted in the first quarter of 2018, reflecting the back-end weighting of shipments within Q1 2019. Our internal inventories at the end of the first quarter of 2019 were $142.5 million, up from the $136.4 million at the end of the fourth quarter of 2018. Days of inventory increased to 205 days at the end of Q1 2019, compared with 180 days at the end of the fourth quarter of 2018 and 177 days at the end of the first quarter of 2018. The 25-day sequential increase is primarily due to an unexpected delay in customers' new product ramps and legacy business push-outs. As we've said in the past, we are comfortable carrying a higher than normal level of inventory during a downturn, given that most of our products are not customer or application specific and carry minimal obsolescence risk. Having said that, while inventories are likely to remain elevated through the second quarter, we do not expect meaningful reductions until early 2020. I would like now to turn to our outlook for the second quarter of 2019. We are forecasting Q2 revenue in the range of $147.5 to $153.5 million. We also expect the following, GAAP gross margin in the range of 54.9 to 55.5 percent, non-GAAP gross margin in the range of 55.3 to 55.9 percent, GAAP R&D and SG&A expenses between $55.5 million and $59.5 million. Non-GAAP R&D and SG&A expenses to be in the range of $38.5 million to $40.5 million. This estimate excludes stock compensation and mitigation expenses. Total stock compensation expense of $17.6 million to $19.6 million including $550,000 that will be charged to cost of goods sold. Litigation expenses ranging between $300,000 to $500,000. Interest in other income is expected to range from $1.4 to $1.6 million before foreign exchange gains or losses. Fully diluted shares to be in the range of 45.1 to 46.1 million shares. For this second half of the year, We still see some uncertainty in our end markets and remain cautious. We will continue to adapt to the changing market conditions and execute as planned. I will now open the phone lines for questions.

Thank you. Ladies and gentlemen, if you have a question at this time, please press star then 1 on your touchtone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. To prevent any background noise, we ask that you please place your line on mute once your question has been stated. Our first question comes from the line of Matt Ramsey with Cowan. Your line is now open.