Monolithic Power Systems, Inc.

Welcome, everyone, to the MPS third 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 Blagan, BP and CFO. During this webinar, we will discuss our Q3 2020 financial results and guidance for Q4 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 Q3 2020 earnings release and in our SEC filings, including our Form 10-K, filed on February 28, 2020, and our Form 10-Q, filed on August 3, 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 Q3 2019, Q2 2020, and Q3 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 third quarter revenue of $259.4 million. 39.3% higher than revenue in the second quarter of 2020 and 53.7% higher than the comparable quarter in 2019. As noted in our September 14th, 2020 update to our Q3 financial guidance, our revenue increased beyond expectations for two key reasons. First, we were able to fulfill our customer's demand that had been delinquent due to past capacity constraints. Second, certain China-based customers requested previously scheduled shipment dates be pulled into the third quarter of 2020. We believe this request was related to trade and regulatory policy changes that occurred during the quarter. These two factors contributed significantly to this quarter's performance relative to the prior quarter of 2020 and to Q3 of 2019. Looking at our revenue by market, third quarter 2020 communications revenue of $54.7 million was up 81.8% from the second quarter of 2020, primarily due to a pull-in of customers' requested ship dates. Communication sales represented 21.1% of our total third quarter 2020 revenue. In our consumer markets, third quarter 2020 revenue of $70.2 million increased 47.4% from revenue reported for the prior quarter of 2020. This extraordinary growth in consumer reflects a combination of market share gains in gaming, wearables, and IoT applications, along with normal seasonality. Consumer revenue represented 27.1% of our third quarter 2020 revenue. In our computing and storage market, third quarter revenue of $75.3 million increased $11.2 million or 17.5% from the second quarter of 2020. The sequential quarterly revenue growth was broad-based with sales gains recorded in high-end notebooks, servers, and storage. Computing and storage revenue represented 29.0% of MPS's third quarter 2020 revenue. Third quarter automotive revenue of $28.5 million grew $10.7 million or 60.4% over the second quarter of 2020. This improvement reflects a more normal ordering level following the Q2 2020 industry-wide slowdown resulting from the pandemic. We believe MPS's market share will continue to expand in the coming years as we have been awarded multiple design wins in infotainment, smart lighting, ADAS, and autonomous driving. Automotive revenue was 11.0% of MPS's total third quarter 2020 revenue. Third quarter 2020 industrial revenue of $30.7 million increased 15.3% from the second quarter of 2020 due primarily to increased revenue for power sources and industrial meters. Industrial revenue represented 11.8% of our total third quarter 2020 revenue. Gap gross margin was 55.1%, matching the second quarter of 2020 and 10 basis points lower than the third quarter of 2019. Our gap Operating income was $60.0 million compared to $28.0 million reported in the second quarter of 2020 and $30.0 million reported in the third quarter of 2019. Non-GAAP gross margin for the second quarter of 2020 was 55.5%. 20 basis points below the gross margin reported for the second quarter of 2020 and 10 basis points lower than the third quarter from a year ago. Our non-GAAP operating income was $84.9 million compared to $53.0 million reported in the prior quarter and $51.4 million reported in the third quarter of 2019. Let's review our operating expenses. Our GAAP operating expenses were $83.1 million in the third quarter of 2020. compared with $74.6 million in the second quarter of 2020 and $63.1 million in the third quarter of 2019. Our non-GAAP third quarter 2020 operating expenses were $59.1 million, up from the $50.7 million we spent in the second quarter of 2020 and up from the $42.5 million reported in the third quarter of 2019. The sequential increase in Q3 non-GAAP operating expenses primarily reflected higher variable costs associated with the increase in revenue and an increased level of investment in securing foundry capacity. The differences between non-GAAP operating expenses and GAAP operating expenses for the quarters discussed here are stock compensation expense, an income or a loss, on an unfunded deferred compensation plan. For the third quarter of 2020, total stock compensation expense, including approximately $707,000 charged to cost of goods sold, was $23.0 million, compared with $21.0 million recorded in the second quarter of 2020. Switching to the bottom line, third quarter 2020 gap Net income was $55.6 million or $1.18 per fully diluted share compared with $30.2 million or $0.64 per share in the second quarter of 2020 and $29.5 million or $0.64 per share in the third quarter of 2019. Q3 non-GAAP net income was $79.4 million or or $1.69 per fully diluted share, compared with $50.6 million, or $1.08 per share in the second quarter of 2020, and $49.5 million, or $1.08 per share in the third quarter of 2019. Fully diluted shares at the end of Q3 2020 were $47.0 million. Now let's look at the balance sheet. Cash-cash equivalents and investments were $554.5 million at the end of the third quarter of 2020 compared to $515.4 million at the end of the second quarter of 2020. For the quarter, MPS generated operating cash flow of about $77.4 million compared with Q2 2020 operating cash flow of $59.3 million. Third quarter 2020 capital spending totaled $19.6 million. Accounts receivable ended the third quarter of 2020 at $93.5 million, representing 33 days of sales outstanding, which was six days higher than the 27 days reported at the end of the second quarter of 2020 and two days higher than the 31 days at the end of the third quarter of Our internal inventories at the end of the third quarter of 2020 were $148.1 million, down from the $152.1 million at the end of the second quarter of 2020. Days of inventory of 116 days at the end of the third quarter of 2020 were 50 days lower than at the end of the second quarter of 2020. The sequential drop in days inventory on hand represented an anomaly due to a decrease in the dollar value of inventory and a 39% increase in quarterly revenue. Currently, our inventory levels are lean. We are working very hard to return inventory to the 180 to 200 day level necessary to support our future growth. I would now like to turn to the outlook for the fourth quarter of 2020. We are forecasting Q4 revenue in the range of $218 to $230 million. We also expect the following. Gap gross margin in the range of 55.1 to 55.7%. Non-gap gross margin in the range of 55.4 to 56.0%. Total stock-based compensation expense of $21.8 million to $23.8 million, including approximately $700,000 that would be charged to cost of goods sold. Gap R&D and SG&A expenses between $81.3 million and $85.3 million. Non-gap R&D and SG&A expenses to be in the range of $60.2 million to $62.2 million. Litigation expense should range between $1.8 million to $2.2 million. Interest income is expected to range from $1.0 million to $1.4 million. Fully diluted shares to be in the range of 47.1 to 48.1 million shares. In conclusion, We will monitor market conditions closely and continue to execute. I'll now open the webinar up 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 Svanberg from Stiefel. Tori, your line is now open.