Monolithic Power Systems, Inc.

Welcome everyone to the MPS second quarter 2020 earnings webinar. Please note that this webinar is being recorded and will be archived for one year on our investor relations page at .monolithicpower.com. My name is Genevieve Cunningham and I will be the moderator for this webinar. Joining me today are Michael Singh, CEO and founder of MPS, and Bernie Blagen, VP and CFO. During this webinar, we will discuss our Q2 2020 financial results and guidance for Q3 2020, followed by a Q&A session. Analysts, you are currently muted. If you wish to ask a question during the Q&A session, please click on the participants icon on the menu bar and then click the raise hand button. In the course of today's webinar, we will be making 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 Q2 earnings release and in our SEC filings, including our Form 10K filed on February 28, 2020, and our Form 10Q filed on May 11, 2020, which are accessible through our website .monolithicpower.com. MPS 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 Q2 2019, Q1 2020, and Q2 2020 releases, as well as to the reconciling tables that are posted on our website. Now I'd like to turn the call over to Bernie Blagen.

Thanks, Jen. MPS achieved record second quarter revenue of $186.2 million, .3% higher than the first quarter of 2020, and .3% higher than the comparable quarter in 2019. Second quarter revenue growth was broad-based except for automotive. Our strong -over-year revenue growth for 2020, in spite of the COVID-19 pandemic, was a result of our diversified growth strategy and our technological innovation. Maintaining this level of superior performance and realizing future growth opportunities requires us to step up investments in capacity, infrastructure, quality assurance, and headcount. We are also expanding our operating capabilities outside of China. Turning now to our second quarter 2020 revenue by market. Second quarter computing and storage revenue of $64.1 million increased $12.1 million, or .3% from the first quarter of 2020. Computing and storage revenue represented .4% of MPS' second quarter revenue. The sequential revenue increase reflected strength in storage revenue along with increased notebook revenue. Second quarter server revenue maintained the elevated levels achieved in the first quarter of 2020, and server revenue was significantly higher than the second quarter of the prior year. Second quarter consumer revenue of $47.7 million increased .4% from the first quarter of 2020 and represented .6% of our second quarter 2020 revenue. The sequential quarterly revenue increase reflected improved sales of products for home applications, IoT, gaming councils, and DOT, which stands for a variety of things. Second quarter 2020 communications revenue of $30.1 million was up by .0% from the first quarter of 2020. Product sales for communications infrastructure, including 5G networking increased sequentially as did sales of legacy router and wireless applications. Communication sales represented .2% of our total second quarter 2020 revenue. Second quarter industrial revenue of $26.6 million increased .4% from the first quarter of 2020 as increased revenue for power sources more than offset a decrease in security-based product sales. Industrial revenue represented .3% of our total second quarter 2020 revenue. Second quarter automotive revenue of $17.8 million fell .7% from the first quarter of 2020 as a number of automotive OEMs shut down production for most of the quarter in response to the COVID-19 pandemic. The range of applications MPS encompasses now 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 revenue is .5% of MPS' total second quarter 2020 revenue. I should point out that despite the past four months of COVID-related travel restrictions, our design activities remain largely unimpacted by the pandemic and have exceeded our expectations across the board. We have seen solid engagement, particularly with top tier customers. These new and continuing customer relationships position MPS for long-term success in these critical markets. Gap gross margin was 55.1%. 10 basis points lower than the first quarter of 2020 and flat compared with the second quarter of 2019. Our gap operating income was $28.0 million compared to $31.0 million reported in the non-gap gross margin for the second quarter of 2020 was 55.7%, up 20 basis points from the gross margin reported in the first quarter of 2020 and 10 basis points higher than the second quarter from a year ago. Our non-gap operating income was $53.0 million compared to $45.9 million reported in the Let's review our operating expenses. Our gap operating expenses were $74.6 million in the second quarter of 2020 compared with $60.5 million in the first quarter of 2020 and $63.1 million in the second quarter of 2019. Non-gap second quarter 2020 operating expenses were $50.7 million, up from the $46.1 million we spent in the first quarter of 2020 and up from the $40.3 million reported in the second quarter of 2019. The differences between non-gap operating expenses and gap operating expenses in the The first quarter of 2020, our stock compensation expense and income or loss from an unfunded deferred compensation plan. For the second quarter of 2020, total stock compensation expense, including approximately $642,000 charged cost of goods sold was $21.0 million compared with the $18.6 million recorded in the first quarter of 2020. Switching to the bottom line, second quarter 2020 gap net income was $30.2 million or 64 cents per fully diluted share compared with $35.8 million or 77 cents per share in the first quarter of 2020 and $20.7 million or 45 cents per share in the second quarter of 2019. Q2 non-gap net income was $50.6 million or $1.08 per fully diluted share compared with $44.3 million or 95 cents per share in the first quarter of 2020 and $41.9 million or 92 cents per share in the second quarter of 2019. Fully diluted shares outstanding at the end of Q2 2020 were $46.8 million. Now let's look at the balance sheet. Cash, cash equivalents and investments were $515.4 million at the end of second quarter of 2020 compared to $492 million at the end of the first quarter of 2020. For the quarter, MPS generated operating cash flow of about $59.3 million compared with Second quarter 2020 capital spending totaled $14.6 million. Accounts receivable ended the second quarter of 2020 at $55.1 million representing 27 days of sales outstanding, which was three days lower than the 30 days reported at the end of the first quarter of 2020 and six days lower than the 33 days in the second quarter of 2019. Our internal inventories at the end of the second quarter of 2020 were $152.1 million up from $131.5 million at the end of the first quarter of 2020. Days of inventory of 166 days at the end of the second quarter of 2020 were five days higher than at the end of the first quarter of 2020. I would now like to turn to our outlook for the third quarter of 2020. As we are still in the midst of the COVID pandemic, demand visibility for the remainder of the year is not as crisp as we usually see at this point in the year. We are forecasting Q3 revenue in the range of $200 to $210 million. We also expect the following. Gap gross margin in the range of 55.2 to 55.8 percent. Non-gap gross margin in the range of 55.5 to 56.1 percent. Total stock-based compensation expense of $21.2 million to $23.2 million including approximately $700,000 that would be charged to cost of goods sold. Gap R&D and SG&A expenses should be between $70.7 million and $74.7 million. Non-gap R&D and SG&A expenses should be in the range of $50.2 million to $52.2 million. Litigation expense should range between $1.8 and $2.2 million. Interest income is expected to range from $1.5 to $1.7 million. Fully diluted shares should be in the range of $46.5 to $47.5 million. In conclusion, we continue to grow year over year. We are excited about our design activities in the pipeline and expanding our reach in the new frontiers. I will now open the webinar for questions.

Thank you, Bernie. Thank you, Analyst. I would now like to begin our Q&A session. As a reminder, if you would like to ask a question, please click on the participants icon on the menu bar and then click the raise hand button. Our first question comes from Tori Sponberg from Stiefel. Tori, your line is now open.

Yes, thank you. Michael and Bernie, congratulations on another very strong quarter. Before I get into the sort of near-term stuff, you did mention something at the beginning there that you are exploring some operations outside of China. I'm not talking about design centers here, but are you working on something else on the manufacturing side outside of China at this point?

Yes. We are trying to expand another FAP. We are exploring another 12-inch FAP as well as 8-inch FAP outside of China.

Okay, very good. As we look at the September quarter and congratulations on getting to $200 million in quarterly revenue, could you maybe talk a little bit about some of the end markets that are going to drive that growth? I'm sure the storage and server business is going to continue to remain strong, but maybe give us the puts and takes on each end market going into the September quarter.

Tori, you know our product is very fundamental. These are building blocks. We supply all these power, power management for all electronic devices, including automotives. Now, one segment, clearly in this pandemic area, everybody knows the infrastructures for telecommunications and data centers, as well as IOTs and PCs, and they all grow. MPS just supplies these building blocks for all these segments. As Bernie said earlier, other than the automotive, all segments are doing well.

Very broad-based.

Just one last question. The DSO is pretty low now, Bernie, and I mean, I assume that's just purely linearity. Anything else going on there?

No, I think we've always had a very good track record with credit and collections, and the 27 days in the quarter really is a reflection of how front-loaded the initial sales were in Q2.

Congratulations again. Thank you. Thank you, Tori.

Our next question comes from Quinn Bolton from Needham. Quinn, your line is now open.

Thank you, and let me echo my congratulations. I guess, Bernie, you made some comments about visibility being a little bit less, you know, clear today than in years past. Obviously, COVID, you know, it's understandable with the COVID outbreak, but I guess you guys have had a very strong, you know, sort of first three quarters of the year, including guidance for September. Just wondering, can you talk to us about your thoughts on the sustainability of this demand, or are there certain factors, perhaps, to gain console ramp that may be leading to some particular strength in the September quarter that may soften seasonally as we look out beyond the September quarter? And then I've got a follow-up.

Sure. I think that just given the nature of the current macro environment, where we did benefit from accelerated ordering patterns, particularly at the end of Q1, that we don't want to become complacent because we have seen fall-offs in demand after we've had a big run-up like we just experienced. So it isn't that we're seeing anything specifically in the market that causes us concern, but just past experience tells us that it's something that we have to monitor. Yeah.

Bernie's comment was very similar to our statement in Q1 and Q2. We expected at the time that all segments would grow, including automotive. And the magnitude of the growth is a two-hour supply. And even during the first couple of quarters, we mentioned that we have more orders than we can ship. And so now we're going to the second half of this year. The macro conditions to us, that can be not very much, it's still unsettled. And so we will prepare change quickly. But overall, orders are still very good.

And one last thing just to follow up on Michael's comment there is that in the beginning of the year, we did have concerns about supply chain capacity and we've lowered that risk, but that's still an issue that is requiring ongoing management.

Understood. And then longer term, you mentioned you're positively surprised by the strength of the design activity, particularly with Tier 1s. I'm sure you're not going to name customers, but are there a couple of applications you might be able to highlight for us that you're really excited about over the next year or two?

A couple of them, clearly, is the 48 volts. And as we talk about it and other ones in the data centers business, and also as Bernie mentioned earlier, is an automotive, we engage with heavily and a lot of activity in the ADAS.

And I think to keep in mind that in a lot of markets that Michael just listed is that we are relatively small players. So we have a lot of upside greenfield opportunities that should continue to drive our growth for the next two to three years, at least.

Yes. Thank you guys.

Thank you.

Our next question comes from Joshua Buchalter from Cohen. Joshua, your line is now open.

Hey guys. Thanks for taking my question and congrats on the results. I wanted to dig into storage and computing a bit. Given the size of the upside, I was a bit surprised to see server not called out as a driver of sequential growth. Could you maybe provide some granularity on was this a function of, you know, once you were just such a high watermark or was there anything else going on within that market that allowed it to grow less than the other ones?

Thank you. Yes, server growth is not surprised to us. And we talked about it in the past quarters and we expected to grow. And from what you said from a year ago and this year and we will grow substantially from last year. So there is no surprises. And so our product is, as I remind everybody, it's still a power supply and we're powering up the CPUs and powering up all the electronics, electronic devices that's using in the server.

Yeah, and I think we tried to add some color to that in the prepared comments by saying that we enjoyed a noteworthy step up between Q1 and Q2 or Q4 and Q1. And we maintain that same high level in Q2. So when you look at the year over year, server is one of our largest year over year growth drivers.

Our next question comes from William Stein from SunTrack. William, your line is now open.

Great. Thanks for taking my question. Congrats on these very strong results. I'm wondering if Bernie, you can talk to us about backlog versus turns expectations. I think last quarter we had this sort of special situation where you essentially guided for negative net turns. Maybe you can confirm my recollection and clarify what guidance implies in that regard for Q3.

I think that the term that we referred to at the end of Q1 with the toilet paper effect, that there was a outsized ordering pattern in the last four weeks of March. And so we had to take Q2 to more closely understand what that represented. And after we went customer by customer and geography, geography, we found out that there were a couple of drivers, well, three. The first was that there was a step up increase in demand, and particularly as it relates to work from home applications. And so that included storage and 5G and notebooks. And as I said earlier, continued strong ordering within automotive. But there was also an acceleration of demand where the distributors and customers wanted to get in line to make sure that they were not. So what we had to do is a very close evaluation to make sure that we don't let the channel inventories rise too much because of over enthusiasm. But at this point, we enter this quarter again with a similar backlog profile as we had last quarter, meaning that there's low, no reliance on turns business in order to meet our expectations.

Our assumption, the toilet paper effect, there wasn't quite right. There's a very little. And so after we dive in and deeper into our customers, our distributors, and we found that these are gross, real gross and somewhat it's very sustainable.

Thank God. It's so the elevated orders last quarter were not a sort of a trick. They were for real. And it sounds like you're seeing elevated backlog this quarter as well. So maybe the other the other side of this, of course, is supply. And so that's my second question. Bernie, through the quarter, you talked about how supply was the company was more able to deliver. We certainly saw that in the quarter. I think you talked about increased supply at one foundry, kind of a doubling of capacity that's sort of real time and then another expectation for a ramp in Q4 and maybe a new foundry from one of your existing partners. I think together it sounded like that was 40 percent, you know, additional capacity, which suggests maybe up to two years of sort of runway. Maybe you could clarify. I think you on the call earlier, you talked about two two fabs that are ramping now. Maybe you can just clarify for us where we are and where you expect capacity to go over the next two quarters.

Yeah, I think that, you know, to give full credit the our operations capabilities were put to the test in the early part of this year's. And I think that we responded as well as one could have expected. And most of the numbers that you cited as far as the capacity expansion are pretty close to the mark. Mark, I'm not going to confirm or reject them that you're in the ballpark. And I think that it remains an issue because as we look ahead, our growth prospects for the next three to five years certainly are significant. And so what we're trying to do is get both capacity, but then also get it geographically distributed. So that's going to require a continuing level of investment as we look ahead here for the next few years. Thank you.

The next question is from Chris Casell from Raymond James. Chris, your line is now open.

Yes, thank you. Good evening. And congratulations on the pioneering conference call format, which seems to work very well. So my first question is just to follow on from the from the from the other question. And with respect to capacity and the constraints that you're on that you're under right now, do you foresee a situation, you know, over the next few quarters where those capacity constraints could be an impediment to revenue? You know, I guess from from where we are right now and actually we're seeing it appears that we're seeing some good upside. The toilet paper effect is not having the effect that we feared. Is there still sufficient headroom for revenue growth as we go through the next few quarters as you're putting these capacity plans in place?

Yeah, I would. I would. Let's put that way. And I think our production people's and they're working over 100 percent. And we we still have more revenue that we can ship. I mean, we can order more than more than we can ship. OK, and as we increase the capacities in the in the last six months and the the issues are much better now.

And I would also probably just having learned from this recent experience that we're more likely to also increase our internal inventories. So we don't have to rely upon necessarily in the moment production excellence.

Great. As a follow up with regard to the compute segment, you know, we've heard from from some others is that the market itself, I guess there's some areas of the compute market which look like they'll be slowing as you go in the second half. There was some of that work from home demand in notebooks, for example, that looks like it was pulled forward to the first half. You know, Intel had talked about some of the data centers, cloud data center revenue, which may be showing some decline after a number of strong quarters. I know you have a lot of content increase as well. And I guess the question is, if the market should slow, one, is that what you're seeing? And secondly, the extent of your content increases, are they greater than what's happening in the market?

You know, we are the new players. We're relatively small player in the market segments. And we don't see for our revenue growth, we don't see any slowdown. And as we became a much bigger, bigger percentage, now we can answer your questions better. Thank

you.

Our next question comes from David Williams from Luke Capital. David, your line is now open. We'll move to the next question. This comes from Ross Seymour from Deutsche Bank. Ross, your line is now open.

Hi, guys. This is Melissa on for Ross. Thank you for letting us ask a question and congratulations on a really strong quarter. I was hoping to get your opinion on the automotive end market specifically. Your larger peers were also asking questions about the market. And I know that you're also impacted by the factory shutdowns around the world. As you're thinking about the recovery in the second half, how do you see this business recovering? And I know you don't guide more than one quarter out, but can you help us understand how sales into auto will resume?

Yeah, I think that Q3, we're going to see a re-stabilization in the market. Interestingly, even though the manufacturing of the OEMs was shut down for two to three months, people still continue to buy cars. So there is some pent-up demand that they need to meet. But I think that the ramp may not be, it won't necessarily snap back. I'm expecting to see some additional improvement in Q4 as they start to roll out the new model year. But I don't see it being the stair-step growth that we've experienced in past years.

Our next question will come from David Williams from Loop Capital. David, your line is now open.

Perfect, thank you. And thanks for letting me ask the question, and congrats on the quarter. I guess the first question is really around the gaming console, and maybe if you could provide any color around the benefit in the quarter from the gaming console, and then maybe how that layers into the remainder of the year.

Yeah, I think that the gaming console is a very somewhat predictable business as far as there's almost a bell-shaped curve that occurs over five months beginning in June and ending in October. So that is pretty heavily weighted towards Q3 for what we sell into. And right now the visibility will not be crisp, is the word we used before, probably until late August or early September. Though right now we seem to be tracking very well against our expectations.

Okay, so you'd characterize that as maybe stable towards your expectations.

Yeah, stable is not a word I normally assign to gaming consoles, because it does create this bubble which has certain of its own management challenges. But yes, I would say that the demand is meeting our expectations, and we have adequate supply chain to handle it.

Great. And then maybe thinking about the data center and maybe some of the computing, how much of this do you think is maybe pull-ahead versus more cycle-related? Do you think this is sustainable? I realize you're a smaller player, but do you think you're seeing any pull-ahead here, or do you think all of this is maybe natural demand that would have come through pandemic or not?

No, I think the work from home phenomena is real, and at some level we are able to quantify it. But I do think that it is a more front-end loaded cycle, as we sort of offered an earlier response. And the only thing to really add is that we're such a small player, and this is sort of our first opportunity to really experience accelerated revenue growth. Again, our visibility and predictability is a little bit low for us right now.

Great. Thanks so much.

Our next question comes from Rick Schaefer from Oppenheimer. Rick, your line is now open.

Thank you, and I'll have my congratulations. Nice job, guys. I guess my first question, nobody's talked about or asked about 5G yet, so maybe if you could give a sort of update of your progress on the 5G for you guys. You know, Howard King's the largest customer there. I know there's been some uncertainty. I know the government heard Trump was trying to do different ways to defy the white man with that customer. And I didn't know if you can talk about how many other programs you're shipping to now, or to just work with that or follow up.

Rick, your question is barely audible, very interpretable. We can try. I can try to answer your question. I can answer your question. 5G is one of our biggest opportunities, and very highly concentrated customers. And as you know, with 4G, we don't have any revenues, very little revenues. And now we became a significant player in there. And that's because of our technologies. And as far as where to grow and which regions, clearly China is emphasized. And Huawei is the biggest player now. And all the other regions, we engage with them deeply. But I have to say they're much slower. And what is the impact for our future business? I believe it's a matter of time. The longer the time, the longer the time will give us, it will be actually better for MPS. And all the other players are familiar with MPS and familiar with MPS technologies. And the time is actually on our side. But it may affect the revenues. But in China, we see it keep growing in a 5G network.

Our next question comes from Camille Miseric from William Blair. Camille, your line is now open.

Good evening. Thanks for taking my question. First is I just want to follow up on 5G. Can you provide some detail on how to think about the content you have, and specifically the potential SAM, given your POL products can be used in transceivers, space stations, fiber optic networks and back end data centers? And I assume there's potential for QS mod as well?

Yes, you're absolutely right. Our opportunity, we don't have clear pictures because, again, our product is very fundamental in supplying powers. And doing power management for each component. And it's really a rough calculation is more than $40, $50 per station.

That's great. Thank you. And just a quick follow up. How should we think about your entrance into the HPA market? I believe you are initially targeting medical and communication applications. And what's your differentiation versus competitors like TI? And now lastly, is this a 2021 revenue event?

The primary competition is really with ADI. And this is the advanced analog. And you're exactly correct that the first opportunity that we're pursuing is actually with a customer. And they've provided us their spec. And we would expect to be able to have a product that can be prototyped by the end of this year and have initial revenue after that. As far as the longer term roadmap, we talked about communications because it is the next targeted market that we're high performance analog.

And of the data computers. I missed the first one with questions. Okay. Yeah. Okay. Go ahead. Yeah.

So just finishing up where the need for high frequency and high precision. And as I said, there's only one or two other players out there. It's very difficult market to penetrate. But here again, we believe we're very well positioned to move into it over the course of the next three to five years.

The next question comes from Tori Somburg from Sifo. Tori, your line is now open.

Yes, just to follow up and Michael, I'm asking you this question because I really respect your view. And, you know, if you look at Max and Linear ADI, you know, they've been competitors of yours for many years, whether for business or for engineers. They're now all going to be under one umbrella. What do you think that means for the analog space and perhaps for Molythig Power specifically?

Thanks for saying you respect me. Yeah, I think it's the same. But in the Maxims and in the linear technologies, they are very proven and companies and they competed as we in the past competes with them. And the MPS has a little bit of agiles in terms of technology development and product development. So our growth is the fastest. And I think in the future, MPS now has become a meaningful player. And we are in a few look at the linear technologies, what are one point some billion dollars. The MPS is very close to it. And so our customers were looking for a second or multiple suppliers. And with the superior technologies, I think that will give us more more opportunities.

Very good. Congrats again.

Thank you.

Next question comes from Kevin Berrigan from Rosenblatt. Your line is now open.

Thanks for taking my question and congrats on a great quarter. Just a quick one for me. Can you give us a little color on your e-commerce business? I know with everything kind of virtual now and your recent agreement with Farnell Electronics, can you kind of talk about what's going on there?

Yes. OK, that's the e-commerce. And glad that you still remember that. And I have to say it's a very slow. And but I really believe that I firmly believe that. And we we see some initial result. And after if you follow our website and our websites change, keep evolving. And and up to a point now, we know how do we double or triple that our the the subscribers and especially more than triple. And but small start with a small numbers. And so we're still doing a lot of surveys and and now I think the website is good enough and we can work with our partners and and online partners and distributed that the message more much more clearly. And I will see in the in the next next few months and we'll see. I hope to see a lot more result. And but overall, we still believe it. And we're much believe it. And the plug and play solution, it will happen. And in the online distribution, online sales, online configurations, that would be the futures. And so for for NPS opportunities, instead of sell a dollar, sub dollar parts, now we're selling four, five dollars or beyond for each component. So the opportunities still remains and we are still learning. Thanks guys.

Our next question comes from Quinn Bolton from Needham. Quinn, your line is now open.

Great. Thanks for letting me ask a follow up question. Michael, you said does some of the some of the applications you're most excited about are centered around the data center as well as 48 volts. So just a couple of following questions with with Nvidia's latest seven animator generation of GPUs going into the data center. So we're wondering if you're able to comment whether you're supplying any power management devices for that new A100 GPU, either in the 12 volts or 48 volts. And then longer term as we look forward to the new Intel VR14 spec, do you have a sense how much of that market might be 12 volt versus 48 volt? Thank you.

All right. Okay. Obviously we don't we don't mention customers names and customers projects names and let's put that way. So like all the 48 volts product that we have a product in it. And in terms of in terms of the VR14 specs, we have a reference designed in there. And NPS will be compared VR13s and we also a small part of it. And and and I think the opportunity for for NPS and it became a significant play as a main main player in the in the VR14 and in the in the next few years.

Both in the 12 volts as well as 48. Oh, yeah.

For the 12 volts and the 48 volts, I can my believe is mostly still still still 12 volts and 48 volts. The application is still limited. Great. Thank you for that, Keller. Yeah.

If there are any follow up questions, please click the raise hand button. As there are no further questions, I would now like to turn the webinar back over to Bernie.

Great. I'd like to thank you all for joining us to this webinar and look forward to talking to you again during our third quarter webinar, which will likely be at the end of October. Thank you and have a great day.