Monolithic Power Systems, Inc.

Ladies and gentlemen, thank you for standing by and welcome to Monolithic Power Systems Q3 2019 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question and answer session. To ask a question during the 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 this over to your speaker today, Chief Executive Officer of Monolithic Power Systems, Michael Singh. Sir, please go ahead. Thank you.

Hello, everyone. Good morning from Shanghai. We held our third quarter board meeting in a newly established customer support and a marketing center for China. We had our board members for the facilities and the overseas operations. In the last few days, we received many messages that showed overwhelmed support in response to a recent publication. I was representing NPS management to express our deep appreciation for your trust and support. Our reaction to this publication is that it is malicious and major. We will not know your intelligence to go through the details. Lastly, I assure you we will take appropriate action, including legal action, against any malicious and unlawful activity damaging NPS reputation. I will share, and I will share all the details. Thank you again. Now I let Sachs speak to the podium. Thank you for that. Good afternoon and welcome to the third quarter of 2019 Monolithic Power Systems Conference Call. In the course of today's conference call, we will make full living statements and projections that involve risk and uncertainty, which could cause results to differ materially from management's current views and expectations. These are part of the State of Harvard Statement contained in the earnings release published today. Risks, penalties, and other factors that could cause actual results to differ are identified in the Safe Harbor Statement contained in the Q3 release and in our SEC filings, including our Form 10-K filed on March 1, 2019, and Q2-19 Form 10-Q filed on August 2, 2019, both of which are accessible through our website at www.monolithicpower.com. MTS assumes no obligation to update the information provided on today's call. We will be discussing gross margins, 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 in accordance with GAAP. The table that outlines the reconciliation between 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 Q3 2018 Q2 2019, and Q3 2019 releases, as well as to the record strategy tables that are posted on our website. I'd also like to remind you that today's conference will be webcast live over the Internet and will be available for replay on our website for one year, along with the earnings release files that the SEC earlier today. NPS achieved record third quarter revenue of $168.8 million dollars 11.8% higher than revenue in the second quarter of 2019 and 5.5% higher than the comparable quarter in 2018. Looking at the revenue by market, in our computing and storage market, third quarter revenue of $52.8 million increased $11.2 million for 26.9% from the second quarter of 2019. Computing and storage revenue represented 31.3% of NPS's third quarter 2019 revenue. The sequential quarterly revenue growth was broad-based on games recorded and power management for GPUs, high-end notebooks, servers, and storage. Coupled with our recent design lens using QSMOD, quantum state modulation, in server and AI applications, MTF is at the early stage of this important revenue ramp. I also would like to introduce a killer product, a next-generation 48-volt power solution for artificial intelligence, server, and super applications. This solution offers one of the highest levels of energy efficiency with the smallest form factor of its class. Our customers have validated our solution, which we believe will win market share in this important segment. Third quarter, automotive revenue, $24.4 million grew 15.1% over the second quarter of 2019, reflecting initial sales of products for entertainment, art lighting, ADOT, and autonomous driving. In addition, we were awarded a relatively large contract and a major tier one automobile supplier. We expect to begin generating revenue from this relationship in the next two to three years. Our mobile revenue is 14.5% of MPS's total third quarter 2019 revenue. Third quarter 2019 industrial revenue of $28.9 million increased 28.6% from the second quarter of 2019 due primarily to increased revenue for security systems power sources, and industrial meters. Much of this growth is project-based, which can vary significantly by quarter. Industrial revenue represented 17.1% of our total third quarter success in revenue. In our consumer markets, revenue of $43.9 million was essentially flat with the second quarter of 2019 and represented 26.0% of our second quarter 2019 revenue. Sequentially, third quarter revenue reflected a seasonal increase in certain legacy consumer markets offset by decreased sales of products for wearable applications and set-top boxes. Fourth quarter 2019 communications revenue, $18.8 million, was down 14.5% from the second quarter of 2019. Infrastructure 5G sales along with sales from legacy router and wireless applications decreased sequentially. Despite the sequential downturn in 5G revenue, we believe NPS is well-positioned to benefit as existing Docs design wins move to revenue. Communication sales represented 11.1% of our total third quarter of 2019 revenues. GAAP gross margin was 55.2%, 10 basis points higher than the second quarter of 2019 and 40 basis points lower than the third quarter of 2018. Our GAAP operating income was $30.0 million compared to $20.1 million recorded in the second quarter of 2018 and $33.5 million recorded in the third quarter of 2018. Non-GAAP gross margin for the second quarter of 2019 was 55.6%, matching the gross margin reported for the second quarter of 2019, but 50 basis points lower than the third quarter from a year ago. Our non-GAAP operating income was $51.4 million compared to $43.1 million reported in the prior quarter and $49.2 million reported in the third quarter of 2018. Let's review our operating expenses. Our GAAP operating expenses were $63.1 million in the third quarter of 2019, compared with $63.1 million in the second quarter of 2019, and $55.5 million in the third quarter of 2018. Our non-GAAP third quarter 2019 operating expenses were $42.5 million. Up from the $40.3 million we spent in the second quarter of 2019 and up from the $40.5 million reported in the third quarter of 2018. The difference between non-GAAP operating expenses and GAAP operating expenses, the reported success here are stock compensation expense and internal loss on an unfunded compensation plan. For the third quarter of 2019, Total stock compensation expense including approximately $641,000 charged to Cost of Goods Sold was $21.3 million compared to $22.7 million recorded in the second quarter of 2019. Switching to the bottom line. Third quarter of 2019 GAAP net income was $29.5 million or 64 cents per share compared with $20.7 million or 45 cents cents per share in the second quarter of 2019, and $31.6 million, or 71 cents per share, in the third quarter of 2018. Tier 3 non-GAAP net income was $49.5 million, or $1.08 for fully diluted share, compared with 41.9 for 92 cents per share in the second quarter of 2019, and $47.3 million, or $1.06 per share, in the third quarter of 2018. Fully diluted shares estimated at the end of Q3 2019 were $45.8 million. Now let's look at the balance sheet. Cash catch equivalents and adjustments were $422.0 million at the first quarter of 2019, compared to $369.7 million at the end of the second quarter of 2019. For the quarter, MPS generated operating cash flow of about $72.0 million, compared with Q2 2019 operating cash flow of $44.1 million. Third quarter, 2019 capital spending totaled $9.1 million, Accounts receivable ended the third quarter of 2019 at $58.3 million, representing 31 days of sales outstanding, which is two days lower than the 33 days recorded at the end of the second quarter of 2019 and three days lower than the 34 days at the third quarter of 2018. Our internal inventories at the end of the third quarter of 2009 were $135.6 million, down from the $143.6 million at the end of the second quarter of 2019. Days of inventory of 163 days at the end of the third quarter of 2019 were 30 days lower than at the end of the second quarter of 2019. The drop in inventory, both in terms of dollars and D represent management's decision to slow weight restarts in response to the market downturn. Under normal circumstances, we are comfortable carrying a higher level of inventory to support our accelerated rate of revenue growth, given that most of our products are not customer or application specific and carry minimal offshore constraints. I would like to turn to our outlook for the fourth quarter of 2019. We are forecasting Q4 revenue in the range of $160 to $166 million. We also expect the following. GAAP gross margin in the range of 54.8 to 55.4%. Non-GAAP gross margin in the range of 55.2 to 55.8%. Total stock-based compensation extends from $18.3 million to $20 million, including approximately $600,000 that would be charged, cost of goods sold. GAAP, RMV, and SG&A expenses between $56.2 million and $60.2 million. Non-GAAP, RMV, and SG&A expenses to be in the range of $38.5 million to $1.2 million. Interest income is expected to range from $1.4 million to $1.6 million. Fully diluted shares to be in the range of 45.8 to 46.8 million shares. In conclusion, we continue to execute and deliver the results that speak for themselves. I will now open the phone lines for questions.

Hello? Yes, are we ready for questions? Yes. Thank you. As a reminder, to ask a question, you will need to press star 1 in your telephone. To withdraw your question, press the pound key. Please stand by while we compile the Q&A roster. Our first question comes from the line of Rick Schaefer of Oppenheimer. Your line is open.

Hi, guys. Congratulations on a nice quarter and another tough, you know, I guess my first question is really, you know, compute, industrial, auto, I mean, all these sort of high-margin kind of new verticals for you are all up nicely. I think double digits year over year. Maybe talk a little bit about relative strength by region or any color you could give there, and if you had any 10% customers or anybody close to 10%, any particular customer strength in the quarter. Sure.

Sure, let me sort of start that off. It wasn't very clear. It's a movement, okay. To restate Rick's question, if that will help, is that he was observing that there's good relative strengths in the quarter for automotive, computing, industrial, And so he was looking for a little bit of color as far as the geographic distribution and if there were any 10% customers or what the level of concentration was. So, yeah. So, Rick, you put your finger on that right mix of what drove our Q3 performance. So if I can comment first on the computing and storage. you know, computing the storage for us in the first half exhibited some weakness over what had been done in 2018. And we saw in Q3 strong momentum across all of our lines of business. And there was no individual or concentration roadmap, nor geographic. So that was nice to see just because the first half this year there have been weak demands. In industrial, that has been an area that has been benefiting or maybe I should say affected by ordering ahead of demand, of an instance, delay. And some of that is occurring in China and should stay the aim for the trade actions. So that was pretty concentrated in power sources and surveillance. Automotive was very broad-based as far as seeing a beginning of sales in new model units in Europe and Korea, as well as a return in some green levels in China. And while I don't have it exact at my fingertips, I do not believe we have any

Okay, thanks. And I apologize if it's difficult to hear me. My second question or my follow-up is just on 5G. It's obviously becoming a bigger contributor to the NPS growth story. And I know you talked about it being softer in the recent quarter, but obviously that looks good. So what's your visibility on reacceleration in your 5G business and maybe how if you could provide a little bit of color about what that dollar content opportunity is for you guys, you know, some color on, you know, your competition there, and maybe share assumptions or expectations. Just some general color on 5G, please. Okay.

General color of 5G? Yes. Okay. All the 5Gs that we receive is our customers having the most risk, okay, and that's I see this is very initial and for the next few quarters, our forecast is that they try to pull in materials. So whether from the last few, to this quarter, to the next few quarters, like we, our guess is that if you have the initial rent, the kind of, and the rent is not very smoothly, kind of lengthy.

Okay, Michael, and any comment on the sort of dollar opportunity, dollar content opportunity when you think about a 5G base station for NPS? Yes.

For us, it's difficult to capture because we provide a very basic building block. From the base station to signal 10 and to central stations, we provide just a basic building block. We actually don't know where the product ended up.

Okay, understood. Thanks, and congrats again.

Thanks, Rick. Thank you. Our next question comes from the line of William Stein of SunTrust. Your line is open.

Great. I think we're all having trouble hearing each other, perhaps, so I'll speak really slowly. I'm hoping you can comment on channel inventory levels. Perhaps remind us what the target level is, what that level of inventory was, earlier in the year where it was in Q3 and perhaps where you expect it to go in Q4? Sure.

So at the beginning of this year, and let me open up with, is that we haven't disclosed the range that we manage to. We talk in more qualitative terms. But certainly as we look at the end of Q1, We finished above our normal range. And a lot of that had to do with the fact that in the quarter, we had higher sales in January and March, with the March sales being disproportional to even spread. The distributors did not have an opportunity to sell through to end customers. So that's why that was up. In Q2, we had a more even decision, and days in the channel returned to normal at the upper end, but normal range. And then in the current quarter, we actually saw terrific sell-through. And again, this is broad-based in all of our geographies. And what we observed is that we're actually at the low end of our range as we finish Q3. So I'd make similar comments as I did on the inventories in the book, but that's probably not the level that we care to sustain it, but it certainly was positive to show that the strong sell firm. Yeah, let me remind everybody, I think that in the early, and regarding to inventory, in the early this year, in one of the, I think it was in February ending talks, And we commented that the outlook was uncertain in our inventory buildup. That was due to the last December quarter that we anticipated the normal growth for NPS is over 20% growth for the entire 2019. In February, we started to reduce our whiffle stock, reacting to low criticism, and also we don't see a clear future. And now we ended up at a very low inventory base, and at low inventory, we have to build it up again. And this is referring to the end story that's on our book. not in the channel.

Great. If I can, one follow-up, please. I think we're all very interested in your expectations for growth in the coming year. I'm not expecting you to guide necessarily for next year, but I think we have an expectation that through a cycle, you post something on the order of up 20 per year. Do you think next year is going to be typical or reflect a recovery in markets so you could at least get close to that number? Or do you think that the current trade situation or anything else would hinder that and keep you materially below it?

Yeah. Good question. And although this quarter we deliver a good measure, we don't want to forecast the next quarter. No, we don't want to forecast the next year. And throughout this period, and I think last year, we said it's not very clear. But we did send all the Greenfield product for or NPS, or Greenfield Market segments, rather, they'll start to grow. And at the initial growth, we just said that even with a 5G ramp, it's not very, it's kind of lengthy. This quarter, we see a 5G, and it's not as good as expected. And now, the next few quarters, it's starting to pool in. And we do see all these... We see this very similar to other segments in the industry. And so, next year... We can't forecast the growth rate. I think it will be better than the index rate by 10% to 15%.

Good enough. Thank you very much, and congratulations on the good results and outlook in this tough environment.

Thank you. Thanks a lot. Thank you. Our next question comes from the line of Torres-Vambert of CFO. Your line is open.

Yes, let me echo the congratulations and especially on the record cash flows. So first question, and maybe just to get a clarification in here, so right now your inventory days are at 160. So what you're saying is that they will probably go back up again in 2.4? Yes. But will they sort of go back to the level you were in Q1 of this year?

Yes. The range that we're trying to manage between 160 to 100 days for inventory on a balance sheet, and that may be a little bit higher than what industry or peer norms would be. But again, just going back to Michael's point, is that we're growing at 10 to 15 percentage points ahead of the markets. As a result, this growth is coming from greenfield opportunities with new products and new markets. And so what we do is we invest above the initial demand so that we have positive experiences with our customers.

Very good. And, yeah, I mean, that's obviously why you had record cash flows this quarter, right, because, you know, that inventory started to selling through, so that's great. Second question is, so it's about a $100 million a year business now, and I think there's no secret that, you know, you're starting to gain a lot of traction directly with some of the OEMs, and you even mentioned, you know, one big contract. So as I think about the $100 million, that does not include any of the sort of direct OEM relationships that you've started to have, correct?

Tori, I apologize. I didn't know which end markets you were talking about.

Automotive.

Automotive? Yeah, $100 million business now, yeah. Okay. And so the question then is how much exposure do we have to the OEMs?

No, no, no. The question is you've started to establish some deeper relationships with the OEMs. I'm wondering if that's sort of already contributing to that $100 million run rate or is that all new business that's still on the come?

So let me play back the question, because we're having difficulty hearing you, and I apologize about that. So you're saying that on the 100 million run rate, as far as what is our exposure to the OEMs, and how much of that is still grappling the question? Yeah.

Yeah, I mean, that's That's fine. I'm just trying to understand, you know, how much of that business is coming from your more recent wins with bigger OEMs.

Oh, yeah. Okay. Reason winning the Reason Award, which is a relatively large project, from a tier one automotive supplier. It's a relatively large project. These will be in the next two or three years. And so far, the existing revenues all ramped up from tier two, some of them very little from tier one. And as we foresee in the next six to nine months, we will win a lot more these types of large projects. So that will pave the next two to three, three to even four years away.

That's exactly what I was asking. Just one last question, and I'll ask a more simple question. When will you be in production with 48V? It's starting now. Great. Thank you.

Thank you. Our next question comes from Alessandro Vecchi of William Blair. Your line is open.

Hi, everyone. Congratulations also on an amazing quarter in this environment. Just on the OPEC side, you guys have done a phenomenal job sort of holding that steady and managing it. I sort of think about balancing your operating expenses going forward with future revenue growth. And then additionally, sort of similar question on the gross margin front, as you guys similarly have done an outstanding job holding those steady, how do we think about the puts and takes of potential margin improvement next year or 2021?

I think we stick our model, which I wrestle with our large shareholders, so I want to spend more money and they want to see the the ETS growth as well. But here, we stick to our model, which is now, I think this year, we're above, right? Yeah. Again, Alex, it's a fair question. We have a model which I believe our investors are familiar with. where we want to be able to provide operating leverage along with the revenue growth. However, in the current market conditions, what we've done is we've tried to hold our gross margin steady while continuing to invest in what we consider long-term strategic investments that will position MPFs in the long term.

Okay. That's very helpful. And then similarly, I apologize if I didn't hear it, but did you give any color on sort of what end markets you expect to be strongest or weakest within the Q4 guide?

When you look at Q4, there's actually a continuation of some of the positive trends that we saw in Q3 with respect to computing storage and also with automotives. and as I've said before, we think that some of industrial had to do with pull-ins, and I look at the 5G, just to echo Michael's point there, is that this is a lumpy business, and while we're ahead of Q3, we still believe that that market has a lot of traction. So the Q4 will be better, and As a consumer, like a normal will be slightly lower, and other ones will keep a very similar level.

Very similar. Okay. Thank you. That's very helpful. That's it for me.

Thank you. Thanks, Alex. Thank you. Our next question comes from David Williams of Loop Capital. Your line is open.

Thank you, and let me echo the congratulations, guys. It's an impressive quarter and guide, and happy to see that. But I was hoping you might be able to give maybe a little more information on your 48-volt architecture, maybe the benefits there, and what that opportunity could be for you, and maybe what traction that you've already begun to see there.

OK. 48-volt systems, we started four or five years ago. That's what we see. That's the train. And in the 48-volt system, there's many components that we ship. And we started shipment about a year ago for some components. And for colluding 48 volts to the GPU, those are the products we've got to win.

What do you think that total opportunity could be if we look a year or two out? What do you think the revenue potential is there?

We have actually, we don't have any ideas. What is the IR? What's the artificial intelligence market? And what's the market size? And for us, it's very big. And that will certainly move NPS to revenue mediums. And we don't have the effort to find out how big it can be between hundreds of millions of dollars. And in the data centers, the adoption rates in 48 volts at the income piece, we don't see many data centers going to 48 volts. Other than the one I can think of, they're advocating for the able, but the majority of the servers are still running at this level. David, if I could add one more comment. 48 volts is the direction that nearly all data centers, whether it's for supercomputing or for e-commerce or for artificial intelligence, will be migrating to. That's what we believe. And we believe that those market segments, sooner or later, give us two or three years, they will merge to 48 volts. Okay.

Next question. And then just lastly for me, can you comment just maybe on the data center inventory? It's been obviously an issue, but what are you seeing now? And maybe from your perspective, are you seeing inventory issues there, or are you maybe benefiting from just the design lens and kind of fake drivers versus the macro?

Well, if you look at it now, all the new product rent for us, you know, you mentioned the 48 rules. These are new products. In the past, I've said again and again, all these new products, our customers take a risk on new products. And we're taking a risk. And we don't want to have any problem in the during shipping, during supply. We don't want to have any interruptions with the qualities, with all these unknown issues. We want to build inventory so we have more material we can ship. Now we are at the stage where we have to put a lot of effort to who do we ship. And we have to build more inventory. David, were you also talking about the data center as far as whether that was penetration in new markets?

Yeah, I was just curious if there was still excess inventory in the data center that had caused some softness prior, if that had been mopped up yet.

Oh, the data center, okay. So I think that the way to characterize this is, and it was interesting, is that the downturn of experience as a result of overcapacity in the data center was broad-based. And likewise, with just our one experience, that also wasn't the individual customer, individual geography. It was an example of very diversified growth, both in terms of our products as well as customers.

Great. Thanks much. Appreciate it.

Thank you. Thank you. Our next question comes from Quinn of Needham & Company.

Your line is open.

Hey, guys.

Thanks for squeezing me in. I wanted to just to start, and I know you probably haven't had a lot of time to go through Texas Instruments results, but they had a pretty poor outlook. Talked about at the midpoint of their December guide, revenue being down 14%, and that's, I think, the eighth quarter in a row where their revenue has decelerated on a year-over-year basis. If I use Texas Instruments as a proxy for the market, it certainly looks like Texas Instruments might be looking to a mid single digit, you know, revenue decline in 2020. And so I guess, you know, can you talk about, you know, if the analog market is down again next year, how comfortable are you with kind of the street consensus for, you know, 18, 19% growth? And to the extent you're comfortable, can you give us some, you know, points where you think you're in growth or where you're differentiated versus some of your broader analog peers? I know that's a big, big question, but let's start there.

Sure. At this point, we've only had the opportunity to review the flash report from TI, so I am at a deficit to understand how much of their business was affected by downturn in analog versus other elements of their business. But certainly, the significance decrease that they projected both from Q3 to Q4 along with the difference between them and consensus, I think they're a market driver. We found in 2019 that we're not, NPS is not immune to what the market movements are like. We continue to focus on the elements within our control, which is to introduce a new product. And as Michael said earlier on this call, we still continue to believe that we can outperform the market at 10 to 15 percentage points, but that the market hasn't found its equilibrium yet. Yeah, there's a weak... There's a new comparison between the NPS and the CI because they are soaping. They're the market. We are a very small... we do have a lot of opportunities. And so there's no comparison. But for us, we start to building by to 10% all these market shares in the different segments. But at the same time, we're also expanding our opportunities. So the growth for us in this market segment is enormous, and we should be much less expected by the macroeconomic conditions.

Thanks very much, Michael. The second question I had is I think in the June quarter you guys saw one customer say, that was over tails and you thought that some of that activity was build ahead, you were able to provide and hit your guidance for Q3. You mentioned some additional build ahead activity in the industrial segment here in Q3 in power sources and surveillance equipment. Have you sort of factored that build ahead in Q3 into your fourth quarter guidance, meaning that if you did see some unexpected strength in, you know, build ahead demand in Q3 that you've sort of those segments in Q4, and that's still reflected in your 160 to 166 guidance? Yes. Obviously, yes.

We're in a few more. We don't have to be in it already. I think you said it all. Okay. Okay, so the answer is yes. Oh, yeah, absolutely. We'll mix quarter by quarter.

Got it. And then lastly, Michael, I just want to come back to the 48-volt. You had mentioned that you've been sampling product, I think, for about a year. I think in the third quarter, GPUs was one of the areas where you saw strength, and just wanted to clarify, was that strength in GPU more from your existing 12-volt design wins, or was that GPU strength in Q3 from 48-volt product?

No, it's more traditional. It's not moving the needle yet, but we do see a healthy growth of the revenue stream coming. Got it.

Thank you. Thank you. Our next question comes from Matt Ramsey of Cohen. Your line is open.

Thank you very much. Good morning over there, guys. Michael, one relationship that my team has been watching closely that NPS has continued to grow is the relationship with Microsoft across the business. Maybe you could, to the extent that you can, could you give us a little bit of color as to the nature of that relationship strategically and how it might benefit the different segments of the business as you move forward. Thank you.

Oh, sure, yeah. We don't find customers. With all our customers, in the past, I said it and that can mean that I don't like a very cyclical business. and which move our revenue all down, and it's not as smooth as we can manage it. In that regard, I made a statement, okay, it's not my favorite, and I thought it was for gaining. And we want to, for our shareholders, we want to build a model very predictable, and a very predictable growth, and the top line growth, margin growth, In that regard, in gaming, you have every year or every two years, and then you have a surge of extra revenue, and then the next two or three quarters start to get lower. That gives us a difficulty. Then our customers say that this is not your favorite. They also listen. And in the following conference call, I clarified. We love gaming because that's good money for shareholders, good value. But that's only models. That's the only business model. And as the NPS grows, the revenue grows, and we're going to over 600 million dollars, And we, a couple years, we see the accelerating growth, and that affects it much, much less. So, I love the game. I love the game. If I can add one additional comment, and while we do not talk to individual customers, you know, one thing that I believe separates MTS from our peers and competition is is that we're very responsive to our customers' requirements. So if they have a nearing challenge, more often than not, they're turning to us in order to find a solution. And as a result, all of our customers benefit from the innovation and the level of technology that we're putting forward that's differentiated. Oh, by the way, Bernie said it. Didn't we not focus here? Our customers are petting us. which we provide the best support, which provides the best service.

Got it. No, I appreciate the sensitivity to the individual customer. As a follow-up question from my side, there's obviously been, not on the 5G side, but in just general data center spending over the last 12 to 15 months, there's been some challenges, and it seems like the market now is anticipating a re-acceleration in cloud spending. You guys have some great content with certain Intel-based servers, but my understanding is there's some diversity of that customer base into other computing providers. Maybe you could talk a little bit about the data center customer base. overall and how you're expecting that business to grow in the next few quarters. Thank you.

Sure. I think strength of is diversity. We have all kinds of different technologies that are suitable for different solutions. So right now we tend to think very much in terms of the e-commerce data center model And that model is very solid and is going to continue for several generations to come. We're seeing, as Michael mentioned earlier, growth through artificial intelligence. And it's hard to really size what those market opportunities look like. But here again, we're positioned to take advantage of it. When we look at some of the applications, data center in support of 5G, we're also very well positioned, and that's also at the very initial stage of growth. So I think that when you look at the customer relationship and how adaptive our technology is for different power solutions, I think we're as well positioned as anybody to take advantage of the new developments of an evolving market.

Thank you very much, guys. All the best.

Thank you. Thank you. Our next question comes from the line of Ross Seymour of Deutsche Bank. Your line is open. Hi, guys.

Thanks for the question or two. First, on the 5G side, I just want to understand a little bit better where you guys are playing there. Is the power management that you're doing largely for one form of processor versus another? Are you more FPGA-related, ASIC-related, ASSP-related? Is there any kind of evolution of how you see that progress as people are a little bit worried that the FPGA side might come down and then other sorts of processors would backfill? And trying to figure out if that does occur, it would impact or benefit monolithic.

The answer is all of us. I don't want to be a fake, but we try to figure out where our product goes. Just to remind everybody, our product is a fundamental block, and that's a power supply block. All the items that you're using, they all need a power. And Our customers typically design several sides of this power box with our product. So each segment from the transmitters to the processing or the data processing to the communication to the fiber lines. for optical lines. They all need them for the power. And we, they don't, within their company, we have to come up with standard products, standard components that their design engineers designed into the, in the end systems. So we don't, we actually don't know where our products ended up. I think you have two parts to your question there, Ross. The first is sort of we have an initial ramp, and how defensible or predictable is that? And I think we've been very clear that, you know, we're in the early stages 5G, and it's really hard to foresee how that's going to develop. But to Michael's point, as far as term in this ramp does occur, I think that we get to take advantage of all aspects of 5G, and that's what we're looking forward to.

Got it. My next question wouldn't be an earnings call at Monolithic if I didn't ask about inventory, so congratulations on that coming down.

Well, if I'm going to give you grief when it goes up, I have to congratulate you when it comes down.

But not to blow too much sunshine at you guys, when you talked about it needing to go back up, How do I, one, is that a dollars or a days comment? And secondarily, how do I reconcile kind of controlling utilization and lowering utilization with inventory rising?

Sure. So if you think about what you do to manage inventory levels, and it starts with the way it starts. So back in February, we, you know, really started to ratchet down the wafer storage. And we did that for an extended period of time. It wasn't just one month. It was over the last six months. Well, those wafers are now coming into our balance sheet. We're receiving them. And it's at a much lower level than we had historically seen and trend lines have been. And yet, we had at the same time you know, okay demands, and there's a lot of good sell-through as well. So that means that our finished goods started to come back into alignment as well. So when we look at composition, we're a little bit light on the raw materials of work in process, and we're probably at about the right level of finished goods. When you look at the ramp that we expect for Q2... Okay, still there?

Again, to ask a question, press star 1 on your touchtone telephone. Again, that's star 1 on your touchtone telephone to ask a question. Our next question comes from the line of Chris Castle, Raymond James. Your line is open.

Yes, hello. Can you guys hear us now? Operator, we may have lost the management team.

I believe we did. Ladies and gentlemen, please stand by. I apologize. There may be a slight delay in today's conference. Please hold. The conference will resume shortly. Thank you for your patience. And speakers, you may proceed. Bernie and Michael are back online. We'll go ahead and go to the next question. From Deutsche Bank, your line is open. Hey, guys. Can you hear me?

Just fine. Thank you. Oh, that was perfect. Yes.

Yeah, so I guess you were halfway through and you probably continued talking even though we couldn't hear you. The inventory side of things, Bernie, you were walking through the utilization and the WIP versus the raw materials versus all of that. I think the punchline to it was what you didn't say. Does that mean that dollars of inventory are going to start going back up, days of inventory both, in any sort of target range that you expect to get to?

Again, while we quote our range of days between 160 and 180, the fact is that we manage internally to dollars of inventory anticipating wafer starts about six to eight months in advance of when the revenues are expected to ramp. So right now we're starting to put wafer starts in for in support of business for Q2 and Q3 of 2020. And so in that regard, we expect to sort of see a replenishing on a dollar basis. And then obviously, as you look at the cyclicality of our revenues, where normally Q1 is about two or four percentage points lower than Q4, that in the lower denominator, the bays would also go up because of that. So my comment was really intended to talk in terms of dollars. And then I think you have to reflect the impact on the days given our seasonality.

Got it. Two relatively quick ones I just wanted to understand. One, the litigation expense seems like it's guided to be about double of what it usually is. Is that something a court case coming due, or is it something that is one time in nature, or is that a new base we should be looking at?

This one is not a long time. It's a one-time case, and we have a trial date coming up here in the next quarter or so.

Gotcha. And then the last quick one is IT security camera side of things. I just wanted to – I know you commented on that earlier, but when you said that customers were building inventory – Is that something that was meant to be a retrospective comment to the first half of this year or second or have you, or did you see that as an ongoing benefit to your revenues in the third quarter? And if so, what do you believe that will do in the fourth quarter?

Well, again, this speaks to sort of the market uncertainty that we're all experiencing. And I think that... If I look at the trend line for industrial where we report this revenue stream, it has been significantly higher than its normal run rate for us. And so I think you can infer that there were some pull-ins, and that could have some impact on how this particular segment and market performs in the next quarter or two. We've heard different... different messages from customers to end customers. For the good news, they have a few new launch projects that start to win. At the same time, we also heard they're pulling because of the tariffs. Again, we're building very, you know, basic building blocks. And we're not at Intel, so the building process, and you can see how many servers and how many PPs they build. We can tell. Our still very small cost of the entire build of material. Got it. All right, guys, that's it for me. Thank you.

Thank you. Thank you. Our next question comes from Picasso of Raymond James. Your line is open.

Yes, thank you. Good evening and good morning for you guys. The first question is with regard to the 10% plus customer that you had in the second quarter, and it sounds like that customer wasn't a 10% customer in the third quarter. Could you give some color about what was – what was going on there, and, you know, has the revenue level at them now normalized as you look forward into the Q4 guidance?

Yeah, I think that we don't talk about individual customers, but since they get reported in our 10Q for the Q2, we'll say that we have a number of relationships beyond even this particular customer that are very broad-based and where they can have multiple product ramps that are occurring at the same time. That's clearly what transpires here. We don't have a consistent more than 10% customers. This quarter, we don't have it, and we don't have it. In the past, I don't remember whether we thought of it or not. There's a one for a certain week, a certain period of time, a day, spot, over, over, simply. But it can be a gift from customers. And overall, we have a very long tail of a number of customers. That's due to our Our business would build a building block, and many customers, they can use that.

Got it. Thank you. I guess the last question is, with respect to your goal of growing 10% to 15% above the industry, it's sort of an abstract goal. The way I'm tending to think about it, tell me if you agree, is, that you'd need to generate somewhere between $75 and $90 million of incremental revenue. Perhaps your un-rate business grows at the market rate, and this would be on top of that. And I guess if that's the right framework to think about it, what gets you to that? What sort of things can you point to as you look into next year that drive that visibility for that level of design win as you look into next year?

It's a very simple business process. We have a product line. We have a geographic sales group. We have a product line review there for production for the next couple of years and more in the longer term. Sales is more immediate in the next few quarters. We gather all these members, and the members, we check in again, and also sales groups, and also we see some wide swing in the last nine months due to the tariffs, due to more than last year or so. And there's a much more... a lot more than the previous two or three years. That's because of tariffs, government policies, and those are what we cannot predict. Now, we're looking for next year why we can say we can do that. One is based on the historical members and that we always can do that. What is the real theory behind it? Is it even more empirical than really a theory? On the other hand, we're looking at all these sales numbers. These sales numbers are sometimes much bigger than we expected. Do we believe that? we can grow a lot more than that. Even at the beginning of the year, in January, we forecast to grow more than 20%. And for me, it's very different. So we, to our shareholders, we say that that's based on the historical numbers, we can grow this much.

All right.

All right. Thank you.

Okay.

Thank you.

Thank you. At this time, I'd like to turn the call back over to Bernie Bleggin for any closing remarks. Sir?

Great. I'd like to thank you for joining us for this conference call and look forward to talking to you again during our fourth quarter conference call, which will likely be in early February. Thank you and have a great day. Thank you very much.

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