Monolithic Power Systems, Inc.

Ladies and gentlemen, thank you for standing by, and welcome to the Monolithic Tower Systems Incorporated First Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. Please be advised that today's conference is being recorded. Now it's my pleasure to turn the call to Bernie Blecken, Chief Financial Officer.

Thank you. Good afternoon and welcome to the first quarter 2020 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 the earnings release published today. risks, 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 February 28, 2020, 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 financial 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 2019, Q4 2019, and Q1 2020 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 earnings release filed with the SEC earlier today. Before going through our financial results, I would like to acknowledge the difficult circumstances we are all operating under. At MPS, we have taken all necessary precautions to ensure the safety of our employees, our suppliers, and our customers. At the same time, we remain focused on the need to execute to the highest level possible. Our worldwide efforts are reflected in our continuing level of innovation and customer support. In response to the news of extreme shortages of medical equipment, MPS rose to the occasion to fight the global pandemic. As described in our recent press release, MPS developed and assembled an emergency ventilator prototype in a matter of days, leveraging a MIT open source design concept. We demonstrated our technological superiority and deep system application knowledge to showcase our capability to advance from a component provider to a solution provider in a short period of time. We believe we can help our customers to do the same by taking advantage of MPS's vast and diversified product portfolio, which is highly programmable, flexible, and feature-rich. We are also encouraged by the excitement we have received from our existing and potential customers that will lead to many promising opportunities in the medical device industry. Turning now to our financial results, MPS posted record first quarter revenue of $165.8 million, 17.3% higher than the comparable quarter in 2019. MPS continues to benefit from our technology leadership and diversified multi-market strategy. Looking at our revenue by market, in our computing and storage market, first quarter 2020 revenue of $52.0 million increased $12.8 million in or 32.6% year-over-year. First quarter 2020 computing and storage revenue represented 31.3% of MPS's first quarter 2020 revenue compared with 27.7% in the first quarter of 2019. The year-over-year revenue increase primarily reflected sales growth for cloud-based servers and storage. First quarter 2020 communications revenue of $27.9 million rose $5.7 million or 25.6% from the first quarter of 2019. The year-over-year revenue increase primarily reflected higher 5G networking sales. Communications revenue represented 16.8% of MPS's first quarter 2020 revenue, compared with 15.7% in the first quarter of 2019. First quarter 2020 industrial revenue of $25.2 million increased 18.3% from the first quarter of 2019 and accounted for 15.2% of our total first quarter revenue. The increase over the first quarter of 2019 primarily reflected gains in smart meters and security applications. First quarter 2020 automotive revenue of $23.3 million grew 13.6% over the same period of 2019, representing 14.1% of MPS's first quarter 2020 revenue. This growth primarily represented increased sales of infotainment, safety, and connectivity application products. First quarter of 2020 revenue from consumer markets of $37.4 million grew decreased $700,000, or 1.9% from the same period of 2019. The year-over-year revenue decrease reflected continuing reductions in demand for set-top boxes and flat-panel TVs. Consumer revenue represented 22.6% of our Q1 revenue compared with 27.0% contribution in the first quarter of 2019. The outgrowth margin was 55.2%. 10 basis points higher than the fourth quarter of 2019 and flat with the first quarter of 2019. Our GAAP operating income was $31.0 million compared with $30.7 million reported in the fourth quarter of 2019. For the first quarter of 2020, non-GAAP gross margin was 55.5%, matching the fourth quarter of 2019 with 10 basis points lower than the first quarter of 2019. Our non-GAAP operating income was $45.9 million compared to $50.8 million reported in the fourth quarter of 2019. Our GAAP operating expenses were $60.5 million in the first quarter of 2020 compared with $61.2 million in the fourth quarter of 2019. Our non-GAAP first quarter 2020 operating expenses were $46.1 million up from the $41.8 million reported in the fourth quarter of 2019. This increase primarily reflected higher Q1 payroll taxes and increased investment in new products. The difference between non-GAAP operating expenses and GAAP operating expenses of the quarters discussed here are stock compensation expense and income or loss on an unfunded deferred compensation plan. For the first quarter of 2020, Total stock compensation expense, including approximately $600,000 charged to cost of goods sold, was $18.6 million compared with $18.7 million recorded in the fourth quarter of 2019. Switching to the bottom line. First quarter 2020 GAAP net income was $35.8 million, or 77 cents, per fully diluted share of compared with $32.4 million, or 70 cents per share, in the fourth quarter of 2019. Our Q1 2020 tax provision of minus 22% was due to a one-time discrete tax benefit resulting from stock compensation. First quarter 2020 non-cap net income was $44.3 million, or 95 cents per fully diluted share. compared with $48.4 million, or $1.04, per fully diluted share in the fourth quarter of 2019. Fully diluted shares outstanding at the end of Q1 2020 were $46.7 million. Now let's look at the balance sheet. Cash equivalents and investments were $492.3 million at the end of the first quarter of 2020, compared with $458.5 million at the end of the fourth quarter of 2019. For the quarter, NPS generated an operating cash flow of about $51.4 million, compared with operating cash flow of $61.0 million in the fourth quarter of 2019. First quarter 2020 capital spending totaled $10 million. Accounts receivable ended the first quarter of 2020 at $54.3 million for 30 days of sales outstanding, up one day from 29 days at the end of the fourth quarter of 2019. Our internal inventories at the end of the first quarter of 2020 were $131.5 million, up from the $127.5 million at the end of the fourth quarter of 2019. Days of inventory increased to 161 days at the end of Q1 2020, compared with 155 days at the end of the fourth quarter of 2019. I would now like to turn to our outlook for the second quarter of 2020. We are forecasting Q2 revenue in the range of $167 to $173 million. We also expect the following. Gap gross margin in the range of 55.0 to 55.6%. Non-GAAP gross margin in the range of 55.3% to 55.9%. GAAP, R&D, and SG&A expenses between $60.9 million and $64.9 million. Non-GAAP R&D and SG&A expenses to be in the range of $43.4 million to $45.4 million. This estimate excludes stock compensation and litigation expenses. Total stock-based compensation expense of $18.1 million to $20.1 million, including approximately $600,000 that would be charged cost of goods sold. Litigation expenses are expected to range between $1.7 to $2.1 million. Interest and other income is expected to range from $1.7 to $1.9 million before foreign exchange gains or losses. Fully diluted shares to be in the range of 45.8 to 47.8 million shares. In conclusion, we are not immune to the macroeconomic reality, but our long-term growth prospects remain intact. We will continue to execute to our plan and are prepared to manage the volatility of future customer demand. I will now open the phone lines for questions.

Thank you. And ladies and gentlemen, as a reminder, to ask a question, you will need to press star 1 on your telephone. To withdraw your question, press the down or hash key. Again, if you have a question, just press star then 1 on your telephone keypad. And our first question is from Tori Vanberg with TIFO. Please go ahead, Tori.