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 www.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 Blagan, 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 10-K filed on February 28, 2020, and our Form 10Q, filed on May 11, 2020, which are accessible through our website, www.monolithicpower.com. NPS assumes no obligation to update the information provided on today's call. We will be discussing gross margin, operating expense, R&D and SG&A expense, operating income, interest and other income, net income, and earnings on both a GAAP and a non-GAAP basis. These non-GAAP financial measures are 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 Blagan.

Thanks, Jen. MPS achieved record second quarter revenue of $186.2 million, 12.3% higher than the first quarter of 2020, and 23.3% higher than the comparable quarter in 2019. Second quarter revenue growth was broad-based except for automotive. Our strong year-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 23.3%, from the first quarter of 2020. Computing and storage revenue represented 34.4% of MPS's 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 27.4% from the first quarter of 2020 and represented 25.6% of our second quarter 2020 revenue. The sequential quarterly revenue increase reflected improved sales of products for home applications, IOT, gaming councils, and VOT, the new acronym, which stands for a variety of things. Second quarter, 2020 communications revenue of $30.1 million was up by 8.0% 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 16.2% of our total second quarter 2020 revenue. Second quarter industrial revenue of $26.6 million increased 5.4% 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 14.3% of our total second quarter 2020 revenue. Second quarter automotive revenue of $17.8 million fell 23.7% 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, ADAS, and autonomous driving. Again, we believe MPS is well-positioned to accelerate growth in automotive when the market returns. Automotive revenue is 9.5% of MPS's 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 first quarter of 2020 and $20.1 million reported in the second quarter of 2019. Non-GAAP 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-GAAP operating income was $53.0 million compared to $45.9 million reported in the prior quarter and $43.7 million reported in the second quarter of 2019. Let's review our operating expenses. Our GAAP 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-GAAP 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-GAAP operating expenses and GAAP operating expenses for the quarters discussed here are stock compensation expense, an 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-GAAP 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 Q1 2020 operating cash flow of $51.4 million. 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 the $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%. Non-gap gross margin in the range of 55.5% to 56.1%. 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, and fully diluted shares to be in the range of 46.5 to 47.5 million shares. 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'll now open the webinar for questions.

Thank you, Bernie. Analysts, 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.