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.

Hey, this is Josh Buckhalter on behalf of Matt. I was hoping to dig a bit into the computing and storage portion of the business. The year-over-year growth is still solid, but it is below your expectations heading into the quarter. Given the overall weakness we've seen across the board in data centers, storage, and PCs, I was wondering if you could provide a little more granularity there and how that dynamic between weak units and your content increases on new platforms plays out. Thank you.

Sure, Josh, and good to hear from you. I think what we're seeing is in Q3 of 2018, there was a step down in SSD revenue, and that's essentially stated that lower plateau in each of the two following quarters. And then in Q4 of last year, we also saw a decrease in server content. And the belief is that certain of the hyperscales have overbuilt the data centers and are taking a pause as they justify the next round of investment.

I think it's an overall, all the design wing activities do the same. And the We compare the last couple of quarters on the server side, we're still getting shares, and I think the revenue has also increased. The momentum is the same.

Got it. Thank you. And then, you know, more broadly, given the soft start to the year, I was hoping to hear some thoughts on your seasonality into the second half and sort of, how your multiple content verticals are playing off on this soft macro that we've seen throughout the entire industry. Thanks for taking my questions and congrats on the solid results.

Yeah, okay. Well, second half, we don't have, we prepared, last year we prepared a lot of inventories and we expect to have a huge ramp 2019. And up to now, still, not very certain, and our customers gave us different signals, and they came in. So, we're just a way in the sea.

Michael Heaney- Yeah, I think that, you know, you're aware that MPS doesn't specifically guide beyond the current quarter, but certainly these are unusual market conditions. If you look at our seasonality going from Q1 to Q2 over the last five years, you'd probably see a trend that we've increased it between 10 and 12% sequentially. Currently, we're forecasting revenue to grow at a slower 7% rate, which I believe is probably indicative of a more gradual broad-based recovery in the macro environment. So I don't see any one catalyzing event that will necessarily turn the tide for us. As I said, MPS expects to see a more gradual improvement in demand through the remainder of 2019.

And overall, we still expect to grow just because of market share gain. But how much growth, it's very difficult to tell now.

Got it. Thank you, guys, and congrats again. Thank you.

Thank you. Our next question comes from the line of Tori Spanberg with Stiefel. Your line is now open.

Yes, thank you. A couple questions. Maybe we can start off with some of the end markets for Q2 specifically. So, yeah, Bernie, you mentioned the growth is sub-seasonal, but it's still growth. So are you seeing all segments recovering, or are some still a bit slower than others?

Well, I think that – You know, we're actually very well positioned across the board, and I think that speaks well of, you know, our diversification. If I had to pick out, you know, a high runner as we look at going into for Q2, I think communications, which took a big step up as a result of initial 5G investments, will continue. at a little bit elevated level over what we saw in Q1, and certainly that represents a significant improvement over the prior year. I think that computing, you're going to see that also is expected to take a step up, but recognizing that it's been at a fairly, I don't want to say depressed, but lower level, as the data centers have sort of hit the pause button. I think also that automotive, I don't see an immediate turnaround there, but I do see an uptick as we go from Q1 to Q2. And then industrial, which has really been at a very elevated level for a number of quarters, will probably return to its normal cadence and consumer, again, is still being impacted by soft demand.

I think the worst one is, as Bernie even said in the last one, is the consumer. And all the other one is we gain market shares, and actually in the Q2, we see better than Q1.

Very good. And, Bernie, did you say CapEx was $59.4 million in the quarter?

I'm sorry, CapEx? Yes.

Yes. Yes. Can you maybe elaborate a little bit on what that money was spent on? Because that's a little bit higher than usual.

Sure. We purchased a building in Kirkland, Washington, which we will be using as both our regional executive offices as well as this is going to be our center for e-commerce, which will give us the opportunity to recruit software engineers with this experience in their background. And if you take sort of a larger view, because if you look back, we have been purchasing software office space over the course of the last two years. And this is part of our geographic diversification program, which allows us to draw talent worldwide for specific end market applications. So as we look forward, we also completed the purchase here a couple weeks ago. of a building in Detroit, which will allow us to create a Center of Excellence Servicing Automotive. And we're in the process of buying office space in Barcelona, where we have a design center. And then also we're going to be building another location a couple hours out of Stuttgart, Germany, in the Rhine Valley. So not only do these moves aid our future growth, but we believe that owning the buildings is accretive to the P&L versus the alternatives of running the facilities.

And those monies, we get a better return than we put in the bank.

Yeah.

It really helps. It's all EPS+. And particularly in Washington, we need more space. And so we can acquire the building as EPS Plus, actually.

Very good. Just one last one for you, Michael. The e-commerce business, I always look for updates there. Could you maybe give us the latest and greatest there, please?

We're still learning. I think so. Overall, we launched the website. We launched the website, frankly, and the activity is not as high as we think. But on our distributor website, our products sell well. So obviously, we're still in the learning stage. and also all the programmable parts, all the modules. If we give them a floppy disk, they can download them and that is doing really well. And we have to somehow have to link to our e-commerce. How do we provide a better usage for our websites And how do they solve their current problem of using those programmable parts? And we're still learning. But the product itself, not selling through e-commerce, we're doing really well. It's better than we really expected it. And some glitch on the website. because it may be our way we're told is too confusing, okay, how to use it, how to program the parts. And we, every other week, we are upgrading in our website. But the concepts from feedback from our customers, These are revolution parts. These are revolution way of designing power supply. And they all like that. But obviously, they still have some missing links.

Very helpful. Thank you. Okay.

Thank you. Our next question comes from the line of Rick Schaefer with Oppenheimer. Your line is now open.

Hey, thanks. My congrats on a solid quarter in a tough environment. Maybe my first question on server. I know your Whitley, we've talked about it anyway, your Whitley content going from, I think, something like $50 with Pearly to $70 or something all in. I think most of that increase is QS mod, I believe. Is there any sense or can you give us any sense of how much incremental server content you'll see as AI accelerator attach rates grow?

uh... and we and we migrate to forty eight volt i mean i would assume that those two things uh... would be incremental for you guys to that to that move to seventy dollars a content but i'm just i'm just curious what that looks like uh... to you guys yes we we have all the design wings and i came in uh... forty eight volts we now started selling uh... many customers we started selling uh... designing the modules and we we expect the second and the Q2 have some kind of ramp. And it didn't happen. But we were still told the second half. And some projects, we understand it has an engineering delay. Other ones, we are not very sure. But for sure, we're winning all these projects.

And, Michael, to be clear, you're not including 48-volt or GPU accelerator or FPGA accelerators in that move for $50 to $70?

No, no, no. Those are separate. Those GPUs and also the AR, these are the contents are much higher, much, much higher. Okay. And the same kind of things for ADAS, GIM 4 or 5. And essentially, it's the same product. And we are winning on many of these sockets now.

Okay. Okay. Thanks, Michael. And then my follow-up question, and this is something I haven't asked in a while. It's on gross margin. You know, but are As you guys ramp 55 nanometer, and I know this is a multi-year progression or transition, but as you ramp 55 nanometer on 12-inch wafers and your mix increasingly favors server, auto, industrial, and eventually SMB or e-commerce, Could we see kind of a similar scenario that we saw on your top line over the last couple of years where you saw the revenue top line actually accelerate? Could we see an acceleration in your gross margin expansion? Or just give us maybe some color there on what those puts and takes are as you see them?

Yes, I think I mentioned it before. We are not going to – the current margin is not – it's not – we don't plan to use, we don't use this as our long-term model. Our long-term model, the margin will go up, and because we're going after all these high-value products, these are with a higher margin associated with it. In the next couple years, these products, obviously, Bernie mentioned it, in the especially in the industrial automotive and part of the servers. And even high-value consumers, the consumer product line, the margins steadily move up. And they move kind of slower. But all the other ones, industrial automotive and particularly e-commerce, when those things taking off, I think that our margin will, in a few years later, you will see a dramatic improvement.

Okay. Thanks a lot.

Thank you. Our next question comes from the line of William Stein with SunTrust. Your line is now open.

Great. Thanks for taking my questions. I want to offer congratulations in weathering a tough demand environment very well. I'd like to first ask, as it relates to the cycle, though, monolithic was a little bit later to see the downturn. I think your company was still presenting this 20% through the cycle as also sort of a current environment situation a little bit longer, or you saw the downturn a little bit later. Should we likewise see the recovery a little bit later for monolithic as well? Is that a reasonable assumption?

I think because you said, as you said, there's a delay. I don't see a delay because all these activities, these are green fields. We didn't have it in four or five years ago. And that design cycle takes two or three years. And all we see is either enter the new product market segments or share gain. And when the market recovers, I think it will accelerate the growth. It will grow faster, much faster than everybody else. And as I said, we will beat the market by 15% at least. Yeah.

I think that's a key ingredient there, Will, is that part and parcel to our belief that we can model annual revenue growth at 20% is that we will outperform the market by 10 to 15 percentage points. So when you look at full year 2018, the market grew at about 11% and we grew at about a little over 24%. So that metric works out. When I look at the guidance for some of our largest peer companies and you aggregate it, there's sort of an acknowledgement really in just the last quarter that full year 2019 probably is going to shrink by about 4% to 5%. So if you look at us as being able to perform at 10 to 15 percentage points better, that gets you into the middle single digits, which is not our historic growth. But again, that margin of how we can outperform the market remains intact.

So to your questions, I don't see how and why we can delay the recovery. So that's my answer.

Okay, I appreciate that answer. Maybe two other real quick ones. First, I think last quarter inventory at distribution increased a little bit at the end of the quarter. I'd love an update on that and also on eMotion, please. Thanks.

Yeah, okay. I'll take the first question, and Michael will take the second.

Okay.

So on the channel inventory, and you have to kind of look at the cadence of how this quarter played out. In January, we actually had a very good month, both as far as new business that we booked, the business that we sold, as well as sell-through by the distributors. I think a lot of that was in advance of an earlier than normal Chinese New Year. February was a little lackluster, and what that ended up doing is making the quarter was really back-ended loaded, which did not allow the channel time to sell that inventory through. So, again, we went up a couple of days, partly because of the shipping pattern and the ordering pattern. as well as you have a lower denominator for the quarter. And a lot of that increase did occur in China.

Thank you. Okay. The e-motions and actually the product is doing great. And if you notice it, we We have online NPS selling small models, including the models now. These are meant to be for demonstration purpose. Actually, we sell quite a bit of models now. Overall, it's still too soon to break out the product line, and it's meaningful. It's a move of the needle now. It's a move of the overall revenue needle.

Great.

Thank you.

Thank you. Our next question comes from the line of Ross Seymour with Deutsche Bank. Your line is now open.

Hi, guys. I wanted to ask a couple questions. The first one is on the inventory side of the equation. You mentioned that there were some push-outs, and obviously the end demand is weak as well. But when you talked to Bernie about you didn't expect it to come down until early 2020, Is that mainly on a day's basis, or are you talking a dollar's basis? And is there some level at which the dollars become worrisome to you in any sort of obsolescence risk or anything like that that we should be concerned about?

So when you look at the increase that we had in Q1 inventory, again, a lot of it reflected wafer starts that began in earlier periods, and we're now going through WIPP and finished goods. And so that, in conjunction with the fact that we did have delays in some of our customers' new programs, and there were some legacy business pushouts, particularly in consumer, accounted for much of the increase. We are taking steps as far as lowering wafer starts, and the impact of that should be visible here in Q2 in terms of dollars. But again, the reason we're not expecting the days of inventory necessarily to come down rapidly is, again, partly a reflection of the continued weakness or the slower uptick in a recovery here. So I don't think that there is a dollar or a day's quotient that would really get me concerned, but I would like to believe that we're at a level where it's plateauing, and then with the opportunity as the recovery gains steam to come down, and as I said in my prepared comments, that's more likely to be in the next year.

Under the current market conditions, let's say if it's the same as the second half of the year, we don't plan to write off a bigger chunk of inventory because these products are all good. We made those products, we created these inventories to prepare for a big ramp. And it may still happen. for Q3. If you look at the inventory, 200 days, okay, 200 days is based on what is Q1's number or Q2's number? Q1. Yeah, Q1's. And if you're looking at a ramp to somewhere 170 million, 180 million, that's nothing. And so we still don't know whether they're going to recover or not. We need these inventory. But these are inventory under the uncertain environment. It is too hard. Got it.

And I guess on the comm side of things, great growth year over year. You mentioned in the past there was some of the gateway in the router side. And then you also mentioned the 5G side of things. Can you remind us on two aspects of the 5G side of things? roughly what size is that as a percentage of either the segment or total revenues? And then the content that you have in 5G, if you could just remind us of how to think about that.

I think they increase both a similar dollar amount. And 5G, Ross, if you remember, is a few quarters ago or a year ago or so, our communication was to go sidelines, go sideways. And I mentioned that we have some killer products coming out. Also, we're waiting for new product cycles. And these products hit the market and now move the revenue needles now. In the gateways, it's very price competitive. And under the current situation, we want the revenues. And we just... Rob, those are market shares.

Yeah, I think this is actually a terrific story that Michael didn't necessarily take full credit because we have remained very committed to the comms market, but what Michael had just said is we never had a killer application to go after it. And I think that that's the reason that for years this segment has underperformed really at you know, going sideways between $15 and $16 million per quarter. But now, so we basically missed out on a lot of the 4G wave. But we've recognized the significance of this market, and we've developed new products that are exceeding our customers' expectations and the requirements. And I believe that we're very well positioned at a time when the 5G infrastructure investments are about to explode. As Michael said, that we're about 50-50 as far as the mix between the lower margin gateway and the infrastructure networking. But I think that that's going to tip very much in favor of the higher margin networking and infrastructure as this rolls out over the next two years.

Got it. And then one last one from me. Given the current market environment. Uh, you talked about what the implications were for inventory and revenue, et cetera. How do you guys think about the implications on your OPEX growth, uh, related to the, the aftermarket?

I think of the, we are, we're, uh, very selective for hiring. Our hiring plan, we changed, we were much reduced and, uh, that's our biggest, our biggest expense. And, uh, So we, but we still hiring and only hire for the best talent. And overall, for the company growth, we've reached.

Yeah, and I think just to add to that real quickly is that we also are continuing our investment with the 12-inch and 55-nanometer which will continue through this year because we believe that's a strategic goal that we want to have in position by 2020. Yep. Okay.

Got it. Thanks, guys.

Thank you. Ladies and gentlemen, if you have a question at this time, please press star then 1 on your touchtone telephone. Our next question comes from the line of Quinn Bolton with Needham. Your line is now open.

Hi, guys. I wanted to first follow up on some comments you made last quarter about the new product slips given the slower environment. I think you had mentioned a number of areas, China, new model automotives, smart meters in China, and then sounded like a few things in the data center GPU server segment. Can you give us some sense when you think those programs may now start to ship?

Oh, yeah. smaller amount. We expect more, but not as much. However, all the activities, and especially these first-tier customers, we engage a lot more than before. And were engaged with even their executive levels. And before, like a couple years ago, nobody knows who is the NPS. And now all these activities went up a lot in the infrastructures and as well as the servers, server market segments.

Yeah, and I'd just like to emphasize something, is that if you look at automotive, where the growth rate is definitely taking a haircut as a result of slowdown, particularly in China, but also it's been actually geographically almost every region was down this quarter. But I really don't want to, I want to avoid putting too much stock on a single quarter-on-quarter, you know, deviation. and really focus, as Michael did, on sort of the macro view that in these areas where we have invested and we have new greenfield opportunities, we're still having a very high level of customer engagement. We're still achieving at the same pace our design win activity. And There have been delays in some of our customers going into markets, but we're not losing any competitive position out of it. And particularly in the areas that we've said are going to be growth areas, for example, ADOS and lighting and infotainment in automotive, those are on track. Obviously, you saw the initial results in the comms market with 5G. So I think that the The basic cadence of the business remains very strong, and it's just a matter of – and I think we're going to be very well positioned when the market returns to a more normal level.

Understood. A second question, you know, if the analog market is down 4% to 5% this year and you can grow – 10 to 15 points faster, it seems like that should get you somewhere between 5% to 10% year-on-year growth, which if I'm doing my numbers right, kind of puts you around where the street consensus is looking for 2019. But I guess street consensus probably has you growing at your normal rate of seasonality in the third quarter, and that's, I think, typically your biggest quarter-on-quarter increase. And then the street is actually up a little bit in December, which is an atypical pattern. You mentioned in the prepared comments that you still see, you know, you still have limited visibility. You know, the industry is still sort of not yet fully recovered. And so I guess I'm trying to get a sense. Do you think an expectation for normal seasonality in Q3 makes sense, or would you say that may be aggressive where you stand today?

Yeah, again, if you use Q2 as an example, even Q1 as an example, Our normal seasonality for Q1 would be down sequentially by four percentage points, and we came down at about 7.9 or 8 percent. So there was a four percentage point delta from our normal sequential movement. And then if you look at what we've guided here, again, if you look back the last four or five years, the growth between Q1 to Q2 would have us going up somewhere in the neighborhood of 10 to 12 percent, 11 percent, just call it. And we've guided revenue to grow at a slower 7 percent rate. And again, I reference that as being more gradual broad-based recovery in the macro environment. So I'd probably suggest that the sequential growth rates for the second half of the year are likely to also be about four percentage points below their seasonal norms.

All these ones are still unknown. And some of the applications and market segments we see pulled in. And other ones push out. So as Bernie said in the script, it's uncertain. So in terms of what's the numbers, why don't you make a number lower and let us beat it. I understand.

The last question for me. In the first half of the year, it looks like you're benefiting from a revenue perspective from this residential gateway business. It is a lower margin business for you. Can you give us any thoughts? You know, how long do you see residential gateways continuing at sort of an elevated level, which may be part of the reason why margins are increasing? you know, lower than where they were second half of last year or third quarter of last year.

Yes, okay, man. These are, okay, I want revenues now. I want revenues. And these kind of things a half a year ago were a little bit aggressive on it, and that's reflecting now. And we also tried consumers, but it didn't have any effect. Okay, I mean, and so... Within the increase, we're still losing, we still have, this quarter we have a significant lower than last year. But it's not because if we lower the price, we cannot get more market shares. So we made a decision to stay as is. The key is we don't lose big major sockets. in the consumer side. Comes back to the router business. We stay aggressive. And this period, and it still makes a very good money. But the margin is lowered. As we gradually, everything else recovers, it speeds up. all the new products and ramp up. And we may go less aggressive on that.

Yeah. And I think specific to the residential gateway, you remember that product stepped up in sales beginning in Q3 of 18. And if we hold with our forecast, will have pretty much fulfilled that opportunity by the end of Q2. So I think that there is an opportunity within communications to see a step up in the more favorable product mix. But again, you know, Michael has said it three times, so I'll do it, is right now there remains uncertainty. And so it's really hard to say how our margins are going to improve in the near term. I think when we look longer term, certainly there will be an accelerated impact on our margins, but timing that right now, again, is uncertain as timing the return to normal for revenue.

Yeah. Actually, there's a other reason why we do this. We want to ensure our supply have a continuity. And so we actually is doing a part of it for our wafer fab. And we ensure their constant loading.

Thank you.

Thank you. This concludes today's question and answer session. I would now like to turn the call back to Bernie Blagan for any closing remarks.

Great. Well, I'd like to thank you all for joining us for this conference call. I look forward to talking to you again during our second quarter conference call, which will likely be at the end of July. Thank you, and have a nice day.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program. You may all disconnect. Everyone, have a great day.