Monolithic Power Systems, Inc.

Good day, ladies and gentlemen, and welcome to the Monolithic Power Systems Inc. Q2 2019 earnings conference call. At this time, all participants are on the listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. Should anyone require assistance at any time during the conference, please press star then zero on your touchtone telephone. Also, as a reminder, this conference call is being recorded. At this time, I'd like to turn the call over to your host, Bernie Bleggen, Chief Financial Officer. Please go ahead.

Thank you. Good afternoon, and welcome to the second quarter 2019 Monolithic Power Systems Conference Call. Michael Singh, founder and CEO 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 the earnings release published today. Rifts, uncertainties, and other factors that could cause actual results to differ are identified in the Safe Harbor Statements contained in the Q2 earnings release and in our SEC filings, including our Form 10-K, filed on March 1, 2019, and Form 10-Q, filed on May 10th, 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 now 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 FCC. I would refer investors to the Q2 2018, Q1 2019 report, and Q2 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. MPS achieved record second quarter revenue of $151.0 million, 6.8% higher than revenue in the first quarter of 2019, and 8.0% higher than the comparable quarter in 2018. Looking at our revenue by market. In our computing and storage market, second quarter revenue of $41.6 million increased $2.4 million, or 6.1% from the first quarter of 2019. Computing and storage revenue represented 27.5% of MPS's second quarter 2019 revenue. Storage revenue was down from the first quarter of 2019. The computing revenue increased. Nevertheless, the growth in computing was slower than what we had planned for back in the second half of 2018. The slower than anticipated growth rate was primarily due to customers delaying product launches or absorbing overcapacity. Having said that, our design activity in the first half of 2019 with top-tier customers reached an all-time high in server, storage, and AI applications, positioning MPS for long-term success in these critical markets. In our consumer markets, revenue of $43.8 million increased 14.8% from the first quarter of 2019 to and represented 29.0% of our second quarter 2019 revenue. The sequential quarterly revenue increase reflected improved sales of products for wearable applications and a seasonal increase in certain legacy consumer markets. Second quarter 2019 industrial revenue of $22.4 million increased 5.2% from the first quarter of 2019 due primarily to increased revenue for smart meters and point-of-sale systems. Industrial represented 14.9% of our total second quarter 2019 revenue. Second quarter automotive revenue of $21.2 million grew 3.5% over the first quarter of 2019. Similar to computing, revenue growth in automotive revenues was lower than we had anticipated three-quarters earlier due to a slowdown in the broader market, and like computing. Our superior technology and design activities, both in standard and custom products, have been widely accepted by Tier 1 customers. The range of applications MPS encompasses includes infotainment, smart lighting, ADOS, and autonomous driving. Again, we believe MPS is well-positioned to accelerate growth in automotive when the market returns. Automotive was 14.1% of MPS's total second quarter 2019 revenue. Second quarter 2019 communications revenue of $22.0 million was essentially flat with the first quarter of 2019. Sales for our legacy router and wireless applications decreased sequentially while infrastructure sales, including 5G network, increased. As 5G spending ramps, MPS is well positioned to benefit as existing design wins move to revenue. Communication sales represented 14.5% of our total second quarter 2019 revenue. Gap gross margin was 55.1%. 10 basis points lower than the first quarter of 2019 and 40 basis points lower than the second quarter of 2018. Our GAAP operating income was $20.1 million compared to $21.7 million reported in the first quarter of 2019 and $24.9 million reported in the second quarter of 2018. Non-GAAP gross margin for the second quarter of 2019 was 55.6%, matching the gross margin reported in the first quarter of 2019, but 40 basis points lower than the second quarter from a year ago. Our non-GAAP operating income was $43.7 million, compared to $39.6 million reported in the prior quarter and $41.4 million reported in the second quarter of 2018. Let's review our operating expenses. Our GAAP operating expenses were $63.1 million in the second quarter of 2019 compared with $56.3 million in the first quarter of 2019 and $52.7 million in the second quarter of 2018. Our non-GAAP second quarter 2019 operating expenses were $40.3 million up from the $39.0 million we spent in the first quarter of 2019 compared and up from the $36.9 million reported in the second quarter of 2018. The difference between non-GAAP operating expenses and GAAP operating expenses for the quarters discussed here are stock compensation expense and income or loss on an unfunded deferred compensation plan. For the second quarter of 2019, stock compensation expense, including approximately $663,000 charged to Cost of goods sold was $22.7 million, compared with $16.0 million recorded in the first quarter of 2019. Switching to the bottom line, second quarter 2019 GAAP net income was $20.7 million, or 45 cents for fully diluted share, compared with $26.2 million, or 58 cents per share, in the first quarter of 2019, and $24.2 million, or 55 cents per share, in the second quarter of 2018. Q2 non-GAAP net income was $41.9 million, or 92 cents per fully diluted share, compared with $37.9 million, or 84 cents per share, in the first quarter of 2019, and $40.0 million, or 90 cents per share, in the second quarter of 2018. Fully diluted shares outstanding at the end of Q2 2019 were 45.5 million. Now let's look at the balance sheet. Cash, cash equivalents and investments were 369.7 million dollars at the end of the second quarter of 2019 compared to 362.3 million dollars at the end of the first quarter of 2019. For the quarter, MPS generated operating cash flow of about 44.1 million dollars. compared with Q1 2019 operating cash flow of $38.8 million. Second quarter, 2019 capital spending totaled $19.3 million. Accounts receivable ended the second quarter of 2019 at $55.4 million, representing 33 days of sales outstanding, which was five days lower than the 38 days reported at the end of the first quarter of 2019 and two days lower than 35 days at the second quarter of 2018. Our internal inventories at the end of the second quarter of 2019 were $143.6 million, up from $142.5 million at the end of the first quarter of 2019. Days of inventory of 193 days at the end of the second quarter of 2019 were 12 days lower than at the end of the first quarter of 2019. 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 application specific and carry minimal obsolescence risk. Having said that, we do not expect meaningful reductions in the near term and inventories are likely to remain elevated through the second half of 2019. I would now like to turn to our outlook for the third quarter of 2019. We are forecasting Q3 revenue in the range of $162 to $168 million. We also expect the following. Gap gross margin in the range of 54.9 to 55.5%. Non-gap gross margin in the range of 55.3 to 55.9%. Total stock-based compensation expense of $18.3 million to $20.3 million, including approximately $600,000 that would be charged to cost of goods sold. GAAP R&D and SG&A expenses between $57.1 million and $61.1 million. Non-GAAP R&D and SG&A expenses to be in the range of $39.4 million to $41.4 million. We are continuing to invest in our new 55 nanometer process technology on 12-inch wafers and are selectively adding headcount despite slower revenue growth. Litigation expense should range between $400,000 to $600,000. Interest income is expected to range between $1.4 million to $1.6 million. fully diluted shares to be in the range of 45.3 to 46.3 million shares. In conclusion, for the remainder of 2019, we remain cautious amidst the market uncertainty. I believe MPS is well positioned for long-term growth. I will now open the phone lines for questions.

Thank you, sir. Ladies and gentlemen, if you have a question at this time, please press star and 1. If your question has been answered or you wish to move yourself in the queue, please press the pound key. Our first question comes from Rick Schaefer from Oppenheimer. Please go ahead.