Monolithic Power Systems, Inc.

Welcome, everyone, to the MPS fourth 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. 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 Q4 earnings release and in our SCC filings. including our Form 10-K, filed on February 28, 2020, and Form 10-Q, filed on November 6, 2020, both of which are accessible through our website. 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 Q4 2019, Q3 2020, and Q4 2020 earnings 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 the earnings release files with the SEC earlier today. Now, I'd like to turn the call over to Bernie Blagan.

Thanks, Jen. For the full year 2020, NPS achieved record revenue, $844.5 billion, growing 34.5% from the prior year. This performance represented consistent execution against our strategies and being recognized by more first-tier companies for superior technologies, product quality, and excellence. customer support. As we see more high-quality growth opportunities ahead of us, we continue to successfully invest in our infrastructure and capabilities that support that growth. Here are a few highlights which we achieved in 2020. Brought online a new 12-inch fab one year ahead of schedule, allowing for qualified parts to be shipped in Q4 of this year. We will continue to invest in the capacity and diversity of our supply chain with plans to bring up a new eight inch fab in 2021. Began volume shipments of 48 volt QS mod technology for AI applications, proving the commercial viability of our leading edge system solutions in this critically important market. Designed an integrated power management solution for autonomous driving vehicles, Shipments began to ramp in Q3 of 2020. Launched our ESG website, aggregating all of our environmental, social and governance values, policies and practices into one easily accessed location. Customers, employees, shareholders are now able to fully appreciate MPS's commitment to sustainability, transparency of our business practices and our ongoing social responsibility. While 2020 was very successful in terms of our financial performance, product development, and new customer acquisition, supply chain capacity constraints for much of the year limited our ability to fulfill all of our customers' demand. This was a result of demand increases during the year and industry-wide capacity constraints. We can take some solace in having recognized this issue in 2019, which propelled us to bring up our second 12 inch fab. Maintaining our ability to meet strong demand while delivering high quality products to our customers has represented an extraordinary challenge that continues into 2021. Despite these challenges, we will continue to execute on our strategic plan. Turning back to full year 2020 revenue, by market segment compared with 2019, communications revenue up 67.9%, consumer revenue up 34.2%, computing and storage up 33.8%, automotive up 20.7%, and industrial up 20.3%, demonstrating just how broad-based our revenue improvement was. Communications revenue grew $57.5 million to $142.3 million. This improvement was primarily due to an infrastructure sales ramp. Communications revenue represented 16.9% of our 2020 revenue compared with 13.5% in 2019. Consumer revenue grew $56.2 million to $220.4 million, reversing two consecutive years of sales declines. This growth reflected higher gain council sales along with increased sales of wearables and home appliances. Consumer revenue represented 26.1% of MPS's full year 2020 revenue compared with 26.2% in 2019. Full year 2020 computing and storage revenue grew $64.0 million over the prior year to $253.2 million. This 33.8% increase primarily resulted from strong sales growth for cloud computing and storage applications. Computing and storage revenue represented 30.0% of MPS's total revenue in 2020 compared with 30.1% in 2019. Automotive revenue grew $18.7 million to $109.0 million in 2020. This growth primarily represented increased sales of infotainment, safety, and connectivity application products. Automotive revenue represented 12.9% of MPS's full year 2020 revenue compared with 14.4% in 2019. Industrial revenue grew $20.2 million to $119.6 million in 2020. This growth primarily reflected higher sales for applications in power sources. Industrial revenue represented 14.2% of MPS's full year 2020 revenue compared with 15.8% in 2019. Switching to Q4, MPS had a record fourth quarter with revenue of $233.0 million. 10.2% lower than revenue generated in the third quarter of 2020, but 39.8% higher than the comparable quarter of 2019. By market segment, revenue for a consumer grew 69.7% year over year. Automotive grew 63.1%. Industrial grew 38.8%. Communications grew 35.6%. and computing and storage grew 11.1%. Fourth quarter 2020 GAAP gross margin was 55.3%, 20 basis points higher than both third quarter 2020 and the fourth quarter of 2019. Our GAAP operating income was $40.0 million compared to $60.0 million reported in the third quarter of 2020 and $30.7 million reported in the fourth quarter FOURTH QUARTER 2020 NON-GAAP GROSS MARGIN WAS 55.7%. 20 BASIS POINTS HIGHER THAN BOTH THE THIRD QUARTER OF 2020 AND THE FOURTH QUARTER OF 2019. OUR NON-GAAP OPERATING INCOME WAS $66.3 MILLION COMPARED TO $84.9 MILLION REPORTED IN THE PRIOR QUARTER AND $50.8 MILLION REPORTED IN THE FOURTH QUARTER OF 2019. Let's review our operating expenses. Our GAAP operating expenses were $88.9 million in the fourth quarter compared with $83.1 million in the third quarter of 2020 and $61.2 million in the fourth quarter of 2019. Our non-GAAP fourth quarter 2020 operating expenses were $63.6 million up from the $59.1 million we spent in the third quarter of 2020 and up from the $41.8 million reported in the fourth quarter 2019. On both a GAAP and a non-GAAP basis, fourth quarter 2020 litigation expenses were $1.5 million compared with a $1.8 million expense in Q3 2020 and a $991,000 expense in Q4 2019. The differences between GAAP and non-GAAP operating expenses for the quarters discussed here are stock compensation and income or loss from an unfunded deferred compensation plan. Fourth quarter 2020 stock compensation expense including $686,000 charged cost of goods sold was $23.0 million compared with $23.0 million recorded in the third quarter of 2020. Switching to the bottom line, fourth quarter 2020 GAAP net income was $42.9 million or $0.90 per fully diluted share, compared with $1.18 per share in the third quarter of 2020 and $0.70 per share in the fourth quarter of 2019. Q4 2020 non-GAAP net income was $62.5 million, or $1.31 for fully diluted shares. compared with $1.69 per share in the third quarter of 2020 and $1.04 per share in the fourth quarter of 2019. Fully diluted shares outstanding at the end of Q4 2020 were 47.6 million. Now let's look at the balance sheet. As of December 31st, 2020, cash, cash equivalents and investments totaled $598.0 million. compared with $554.5 million at the end of the third quarter of 2020. For the quarter, MPS generated operating cash flow of about $79.6 million, compared with Q3 2020 operating cash flow of $77.4 million. Fourth quarter 2020 capital spending totaled $11.5 million. Accounts receivable ended the fourth quarter of 2020 at $66.8 million, or 26 days of sales outstanding, compared with the $93.5 million, or 33 days, reported at the end of the third quarter of 2020. And the $52.7 million, or 29 days, reported in the fourth quarter of 2019. Our internal inventories at the end of the fourth quarter of 2020 were $157.1 million, up from the $148.1 million at the end of the third quarter of 2020. Calculated on a basis consistent with our past practice, and as you can see from the webinar video, days of inventory rose to 137 days at the end of Q4 2020 from the 116 days at the end of the third quarter of 2020. Historically, we've calculated days of inventory on hand as a function of the current quarter revenue. We believe comparing current inventory levels with the following quarter's revenue provides a better economic match. On this basis, again, you can see days of inventory increase to 132 days at the end of the fourth quarter of 2020 from 129 days at the end of the third quarter of 2020. I would like to turn to our Q1 2021 outlook. We are forecasting Q1 2021 revenue in the range of $236 to $248 million. We also expect the following, GAAP gross margin in the range of 55.1 to 55.7%, non-GAAP gross margin in the range of 55.4 to 56.0%. Total stock-based compensation expense of $27.0 to $29.0 million, including approximately $800,000 that would be charged to cost of goods sold. Gap R&D and SG&A expenses between $89.0 and $93.0 million. Non-gap R&D and SG&A expenses to be in the range of $62.8 to $64.8 million. This estimate excludes stock compensation and litigation expenses. Litigation expenses to be in the range of $2.3 to $2.7 million. Interest income is expected to range from $1.4 to $1.8 million before foreign exchange gains or losses. Fully diluted shares to be in the range of 47.3 to 48.3 million shares. we are pleased to announce a 20% increase in our quarterly dividend to 60 cents per share from 50 cents per share for shareholders of record as of March 31st, 2021. In conclusion, our performance in 2020 validated our strategy to grow through diversification and sustainability. We will continue to execute this strategy and invest in our future. I will now open the phone lines 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 the participants icon on the menu bar and then click the raise hand button. Our first question is from Matt Ramsey from Cohen. Matt, your line is now open.