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.