Monolithic Power Systems, Inc.

Welcome everyone to the MPS first quarter 2021 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 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. In the course of today's conference call, 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 Statement contained in the Q1 earnings release. And in our SEC filings, including our form 10 K filed on March 1st 2021, which is accessible through our website. 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 gap and a non gap basis. These non gap financial measures are not prepared in accordance with gap and should not be considered as a substitute for or superior to measures of financial performance prepared in accordance with gap. A table that outlines the reconciliation between the non gap financial measures to gap financial measures is included in our earnings release, which we have filed with the SEC. I would refer investors to the Q1 2020, Q4 2020 and Q1 2021 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 filed with the SEC earlier today. Now I would like to turn the call over to Bertie Blagen.

Thank you, Genevieve. MPS posted record first quarter revenue of $254.5 million, .5% higher than the first quarter of 2020. The year over year revenue increase represented strength in the overall market and more importantly, broad based market share gains resulting from customer acceptance of our new product introductions. 37% of our first quarter 2021 revenue resulted from new products introduced in the last three years. New product acceptance on this scale has paved the way for accelerated growth. Looking at our revenue by market. First quarter 2021 revenue from consumer markets of $66.2 million increased $28.8 million or .1% from the same period of 2020. The year over year revenue increase reflected a broad increase in overall demand along with the initial ramp, revenue ramp from our new mobile device charging IC. Consumer revenue represented .0% of our Q1 revenue compared with .6% contribution in the first quarter of 2020. First quarter 2021 automotive revenue of $44.9 million grew .5% over the same period of 2020. This growth primarily reflected continuing sales growth for infotainment safety and connectivity application products and first time revenue from products introduced in the 2021 model year. Automotive revenue represented .6% of MPS's first quarter 2021 revenue compared with .1% in the previous year. In our computing and storage market, first quarter 2021 revenue of $67.5 million increased $15.5 million or .9% year over year. Do primarily to hire notebook and storage sales. Computing and storage revenue represented .5% of MPS's first quarter 2021 revenue compared with .3% in the first quarter of 2020. First quarter 2021 industrial revenue of $39.8 million increased .7% from the first quarter of 2020 and accounted for .6% of our total first quarter revenue. The revenue increase over the first quarter of 2020 primarily reflected broad based gains in all of our major product groups. First quarter 2021 communications revenue of $36.1 million rose $8.2 million or .4% from the first quarter of 2020. The year over year increase primarily reflected higher networking and wireless gateway home router sales. Communication revenue represented .2% of MPS's first quarter 2021 revenue compared with .8% in the first quarter of 2020. Our sustainable above market growth is based on the following. One, we have and are continuously investing in expansion and diversification of our supply chain. Specifically, we executed ahead of market demand. Two, we accelerated the release of advanced products and solutions based on our leading edge technologies. Three, we've gained increased acceptance of our solutions with first tier customers globally. Four, we continue to diversify and support a wider number of end product applications. Moving now to a few comments on gross margin. Gap gross margin was 55.4%, 10 basis points higher than the fourth quarter of 2020 and 20 basis points higher than the first quarter of 2020. Our gap operating income was $46.1 million compared with $40.0 million reported in the fourth quarter of 2020. For the first quarter of 2021, non-gap gross margin was 55.8%, 10 basis points better than the fourth quarter of 2020 and 30 basis points better than the first quarter of 2020. Our non-gap operating income was $75.8 million compared to $66.3 million reported in the fourth quarter of 2020. Let's review our operating expenses. Our gap operating expenses were $95.0 million in the first quarter of 2021 compared with $88.9 million in the fourth quarter of 2020. Our non-gap first quarter 2021 operating expenses were $66.2 million up from the $63.6 million reported in the fourth quarter of 2020. The differences between non-gap operating expenses and gap operating expenses for the quarters discussed here are stock compensation expense and income or loss on an unfunded deferred compensation plan. For the first quarter of 2021, total stock compensation expense including approximately $816,000 charged to cost of goods sold was $28.6 million compared with $23.0 million recorded in the fourth quarter of 2020. Switching to the bottom line, first quarter 2021 gap net income was $45.4 million or 95 cents per fully diluted share compared with $42.9 million or 90 cents per share in the fourth quarter of 2020. First quarter 2021 non-gap net income was $69.5 million or $1.46 per fully diluted share compared with $62.5 million or $1.31 per fully diluted share in the fourth quarter of 2020. Fully diluted shares outstanding at the end of Q1 2021 were $47.7 million. Now let's look at the balance sheet. Cash equivalents and investments were $641.6 million at the end of the first quarter of 2021 compared to $598.0 million at the end of the fourth quarter of 2020. For the quarter, MTS generated operating cash flow of about $77.1 million compared with operating cash flow $79.6 million in the fourth quarter of 2020. First quarter 2021 capital spending totaled $19 million. Accounts receivable end of the first quarter of 2021 at $84.1 million or 30 days of sales outstanding up four days from 26 days at the end of the fourth quarter of 2020. Our internal inventories at the end of the first quarter of 2021 were $175 million, up from $157.1 million at the end of the fourth quarter of 2020. Days of inventory increased to 141 days at the end of Q1 2021 compared with 137 days at the end of the fourth quarter of 2020. Historically, we've calculated days of inventory on hand as a function of the current quarter's revenue. We believe comparing current inventory levels with the following quarter's revenue provides a better economic match. On this basis, you can see days of inventory increased slightly to 128 days at the end of the first quarter of 2021 from 126 days at the end of the fourth quarter of 2020. I would now like to turn to our outlook for the second quarter of 2021. We are forecasting Q2 revenue in the range of $274 to $286 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 55.5 to 56.1%. Gap R&D and SG&A expenses between $95.9 million and $99.9 million. Non-gap R&D and SG&A expenses to be in the range of $65.5 million to $67.5 million. This estimate excludes stock compensation and litigation expenses. Total stock-based compensation expense of $31.4 million to $33.4 million, including approximately $1 million that would be charged to cost a good sold. Litigation expenses ranging between $2.3 and $2.7 million. Interest in other income is expected to range from $1.3 to $1.7 million before foreign exchange gains or losses. Fully diluted shares to be in the range of $47.3 to $48.3 million shares. In conclusion, we have paved the way to multi-billion dollar revenue. I will now open the webinar for questions.

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

Hey guys, thanks for taking my question and congrats on another set of solid results. I was hoping you could elaborate on the inventory dynamics. You're one of the few companies that invested proactively ahead of the supply issues across the industry, but you're still not near your 180 to 200-day target. So just wondering how you're thinking about balancing rebuilding the channel versus taking business that some of your peers can't serve and also your share gains. Thank you.

Well, as we continue to expand our capacities, as we said earlier, as we said in the last quarters, and I think we expected it with the current rate of increase, the capacity will be at the end of the year or early next year, we will achieve that type of inventory. So if the demand is not continuing to increase this much.

And I think it's notable, Josh, that we did increase both in terms of dollars and days, the amount of inventory we had from Q4 to Q1, which runs counter to the capacity constraints that some peer companies are experiencing.

Thank you. That makes sense. And any more granularity you can provide in the guidance by end market for next quarter? Any of the buckets moving more than the others? Thanks and congrats again.

Yeah, I would probably look to computing where there was a couple quarter gap in data center that data center should begin to take off again. I think automotive appears to be continuing to grow nicely, both in terms of year over year performance and sequentially. And also we're seeing that same continuation in consumer.

Our next question comes from Ross Seymour of Deutsche Bank. Ross, your line is now open.

Hi guys, thanks for letting me ask a question. I want to talk about the sustainability of demand. Recently in this earnings season, a lot of semi stocks have sold off on really good numbers and it clearly looks like the market is worried about double ordering, those sorts of peak cyclical activities. Can you talk a little bit about how your visibility has changed if it all over the last quarter from the demand side of the equation and any kind of general puts and takes about how you view the second half of the year? I know you're only guiding for two Q, but any sort of company specifics or general trends that you'd like to highlight in the second half of the year would be helpful.

Yes, okay. And of course we're concerning a double orders. In the past we said that we have a rigorous procedures to prevent that. And we're practicing partial shipments in the last six quarters. And we make sure our customers have a very minimal on hand inventories. And at the same time we're not preventing their production line downs. So go back to your questions, what's the demands? We believe a lot of our demands are sustainable. The reason we said that, Bernie said earlier in a script, and that for us these are green fuel market, green fuel product line. And we started to grow. And as Bernie said, 37% of our products we grow off from a new product that we released from the last three years. And there is no reason to believe next two years, next year, or not even talking about the next six months, I'm talking about next couple years. These products will continue to grow. And at the same time, the product that we released in the last two years, that will continue to turn into revenues in the 12 months later. So we believe our growth is sustainable.

Great, thanks, Michael. I guess for my follow up, a little more specific on one of your segments, the communications area has been very, very volatile. I know there's bans on different customers that can ship at different points in time. But can you talk a little bit about what's driving the sequential growth that was up so much in the first quarter, admittedly off of a week or fourth quarter? And then as this year progresses, how do you see that market, specifically more of the 5G side of things rather than the networking and gateway sides? We

see, as a matter of fact, Marcia talked to us. We have communication meetings with top tiers and non-Chinese 5G makers. And that market segment, we're picking up. And they believe this year and the next year, they're on the delinquency too.

We believe we're very well positioned, just as Michael said there, because the reach of new customers that we're addressing the 5G solutions is very broad. So we think that as the market gains momentum, we're very well positioned to take full advantage of it.

Great. Thanks, guys, and congrats again.

Thank you. Thank you.

Our next question comes from Tori Spomberg of Stiefel. Tori, your line is now open.

Yes, thank you. Michael and Bernie, congrats again on a very strong quarter. First question, I was hoping you could talk a little bit about your share gains, especially during times when capacity is really tight. So, you know, your solutions tend to be more integrated, especially versus discreet, and a lot of those discreet are in shortage. So I'm just wondering if you are seeing an acceleration in your share gains during this very tight semiconductor environment?

Well, if examples, and I can give you a couple of examples, a couple of scenarios. If we're in dual sources, and our competitors are using, our customers are using two dual source or triple source. If, and ours tend to be a lot more fuel component, then our competitors. And that is one interpretation why the demand is, and we're gaining so much demand. And, and another scenario is for the futures, and we gained a lot of market shares because, just recently, because for those new product, their new project, the shipings, they were putting a production for next six to 12 months. And we have a lot of design weight lately.

Great. And as my follow up and you talked about the contribution from the new products. I know you're not going to give us specific information on pricing, but is it fair to say that the ASPs now of those new products are considerably higher than perhaps the last year or two.

Yeah, for the gross margins that we stay on, of course, and we're not looking for a price hike, and that's probably not sustainable. So, I think we're practicing our models and going the same trend as before. Awesome. Okay. And, and just

to add to that, yes, certainly the new products that we're introducing and particularly those that are more heavily integrated. The mix of business does favor higher ASP for those new products.

Yeah, that's, that's, that's what I thought. Okay, thank you. Congrats again. Thank you.

Our next question comes from William Stein of truest William. Your line is now open.

Great. Thanks for taking my questions. Bernie, you think it was you in the opening remarks. You said something about paved the way for accelerated growth. We all know monolithic system, a pretty amazing job with regard to growth relative to the industry, but should we interpret that as meaning perhaps we stay above 20% for more protracted period of time.

I think that's what we see announced, and, and we see announced and that can be in a year or two years ago so that can we only grow like 8% again in in the last year 30 somethings and that. And this year so far, so we're in a very high, high percentage. And so we look at this, this kind of way will it will continue.

I think that that's the message that we've tried to say in the formal comments and Michael added to that if you look at the, the, the reason for our growth, both last year and this year. It has much more to do with market share gains and new products and having developed our supply chain, then it does necessarily rely upon just the broader market. And so, certainly in 2019 we had high expectations and we were, we're not immune to downturns in the market. But I think that if we have a more normalized demand that we can perpetuate this accelerated rate of revenue growth, perhaps in excess of the 20% mark.

And

then

along these lines I think a couple of other questions might have even alluded to it with regard to higher ASP. I think of a big driver of that is your transition to selling more of these modules and those types of more complex integrated solutions. Is that the case, and I'm hoping you might quantify that for us I think in the past you've talked about growth rates at least offline of the module business maybe you can talk about whether this is reaching a size where it makes sense to disclose revenue from that piece.

Yes, the module business is doing really well. And I think we're beginning to find a way how to grow that business by knowing this is a full-blown business yet. Okay, we haven't really break it out. And, but that business now, I see it in its much higher ASP. And that will start to grow like two years out, it will be a significant difference and a significant contribution to the revenue growth. One

other aspect to add, Will, is that if you look at certain of our end markets and I'll pick automotive as an example, much more of what they're demanding is not for specific IC, they want to have a system solution. So if you look for example at autonomous driving or ADOS, there has to be built in fail safe redundancy, you have to have system communications throughout in the example I'm using here that coordinate the cameras the sensors and the processor. And so you're buying, you're creating entire chip sets for a dynamic solution. And just by the natural consequence of how you're designing those solutions, they have significantly higher ASP.

Yes, and to elaborate on that, and that these are not restricted to only a semiconductor that we designed. And we offer entire solutions. And we designed it, NPS don't produce anything, but NPS, including semiconductor, we designed a semiconductor. The same time we design other other components. And we'll now as a Bernie said earlier, earlier, even in automotive business we're selling solutions, rather than in, in the past, we were selling a single piece of a silica. And in a two or three years later, I don't know how you, how can you specify is an NPS semiconductor company, but we're a solution providers, and we sell solutions, much higher higher ASP.

That's great. Thanks guys. Thank you.

Our next question comes from David Williams of loop capital. David your line is now open.

Thank you and congrats on the quarters. Thanks,

David.

I wanted to touch on the the capacity expansion, and you had mentioned this earlier but how's that progressing and I guess is it moving at the same pace as you would have expected just kind of given some of the tightness that we're seeing within the the industry is or maybe is that moving at your the pace you expected and maybe the pricing of that anything, anything surprising there.

Yeah, capacity expansions that we mentioned about six quarters ago so that gave me and we studied the increase in the, in the last years and we did some extra work so I can increase the capacity so that they can. And from now on, probably pretty continuous this kind of increase. Okay. And, and so Bernie you can you can comment on that. Okay.

Yeah, I think that we've been clear that in 2020, we brought up the 12 inch fab, and now we're continuing to qualify parts on that in 2021 we're midstream and bringing up an eight inch capacity, we're continuing to qualify parts. One of the under reported stories here is that we have existing relationships with our fab partners that date back as long as 15 to 20 years, and they're excellent relationships and we have been able to manage both in terms of when there's under capacity and over capacity, where we have very even handed relationships. So even within our existing foundation or base that they've been encouraged and been very positive contributors to helping us add capacity as well. So I think the important point here, as we said in our earlier comments is that continuous investment has always been a part of MPS. It's a differentiator. And that we see it as being able to expand over the next several years in order to keep up with the increased demand that we're anticipating.

Great. And then maybe just on the leverage you think that that's remaining in the model here obviously there's there's quite a bit that's embedded but how we're thinking that gross margin at the upper end and maybe even the operating margin, where do you think those could go to, as you really start to hit on all cylinders and and get the revenue acceleration that you've mentioned.

Well, as a revenue acceleration, we need to continue to invest. And obviously, as I can't grow out of thin air, so many times. Okay. And as long as long as the growth rate there, okay, we see the growth rate in the next 12 years, in the next 12 months. And once we see that we will invest.

Thank

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

Thanks. Hey guys, I'll add my congratulations as well. I had maybe a couple questions by in market I guess the first one's automotive. I think you guys outgrew SAR by 35 40% last year, you know, and I know tight component supplies, you know kind of curved first quarter auto, you know production didn't seem to hurt you guys too much I know your, your auto business I think was up almost 100%. So I guess my question is, I mean, do you see that as a as an ongoing risk or something that could impact your auto growth, you know, I'm curious. You almost doubled it this past quarter I mean could it have been better if it weren't for for components, you know supply constraints out there, whether they're direct or indirect or, you know, I guess any science things are, you know, are things getting better yet in that auto food chain.

Yeah, whether as our growth is restricted by the shortage of a component from our, our customer size and again we don't really know. Okay, I mean, on the other hand, we have total market shares address addressable market, where NPS in the so small so teeny tiny. And so we will notice it. And all these greenfield product growth, I can mean, and these are new demand. And right off the bat, look at me. And these product is just taking off.

Thanks. Sorry, Bernie.

I'm sorry, just add one more quick comment we have seen nothing at this point to indicate that there's necessarily been a slowdown in ordering an automotive. So, again, as Michael said we can't make a guess as far as you know, whether there is a limit on demand, but we see continued strong numbers in our backlog.

Great, thanks. And maybe just a follow up on hyperscale. If you highlighted Bernie I think you mentioned hyperscale spin kind of picking up or data center, starting to show signs of life so you know curious just with the launch of ice lake and things are, you know, we are picking that up here in that elsewhere as well that hyperscale is getting better. How do you see, I guess, qs mod data center, how do you see that ramping this year, I mean is it relatively linear from here are we going to see a second half inflection of some kind of that kind of build some inertia. And I'm also curious, you know, you know I think last quarter you talked about 48 volts a little bit I don't know is it is it still much too small to kind of break out or talk about or can you give a sense of what kind of contribution 48 volt qs mods, you know, is now. Thanks.

Sure, so let me start with the 48 volt question. You know, I, I believe that there is significant growth opportunity for us in 48 volt, I think we're very well positioned as far as both GPUs and down the road in the eventual. AI. Yeah, AI applications and there are even automotive applications that were positioned with.

These are. If it's not in the six months probably nine months the world the revenue will be significantly up.

Yeah. So then, turning to your other point, the point of inflection for qs mod. And remember just for everybody else's benefit. That's our dynamic power management for the CPU processor. That really we see good growth in what we refer to as VR 13.5. But it's when it goes to seven nanometer VR 14 which is expected for next year. That that that's where we might get much more of an uplift market share gains.

Thank you guys.

Our next question is from Quinn Bolton of need them Quinn your line is now open.

Thanks all for my congratulations. Michael and Bernie I guess my first question is, I think, you know, you've sort of said 2020 and 2021 would be investment years, which would somewhat constrain your operating margin. And here in the near term it looks like your revenues coming stronger than expected. And so even with that investment, your up margins expanding and if I'm doing my math right, it looks like. Our margin will be over 31% in June. How should we think about your level of investment as revenue continues to come in better than expected? Will you continue to invest or do you think you'll you'll drive further operating leverage going forward?

I think up to now from now we see the growth opportunity is even higher than the last than the three years ago. And so we will continue to invest. Okay. As long as we see that, okay. As long as we can keep up that kind of growth rate. And that's another way we definitely slowing down some okay me and until we regroup. Okay. So far. So far we see too much opportunities.

There's no, I guess that's a good problem.

Yeah.

Quick quick. I do think that there are further opportunities for operating margin expansion, but I think that we've tried to be clear on this during the ticket last 18 months that we see that there's more value to our shareholders in being able to accelerate the rate of revenue growth. And that's really where we've been putting most of our emphasis on.

Got it. And the second question is, I think you touched on some of this with your disclosure that new products were 37% of sales, but obviously is the investment community worries about how much double ordering may be going on, given the overall industry tightness. I guess I'm wondering, do you guys have a figure you can give us for the percentage of your products that are either sole sourced and or new products, because I think where you know that the threat of double ordering maybe would be on, you know, older products that are dual sourced. And so I guess I'm trying to figure out, you know, what what percent of your revenue today might be from older products that that could have alternative sources.

Yeah, let me put it that way. Okay, we have 37% of our products. Okay, we have a four or 5000 products. Just think about it. And okay, and these are 37% of a product, and then generally all these revenue, a portion of our revenue is still relatively small. And still still still in the ramping stage. And those product, and those product, they are mostly a single source. And, as you said, these are legacy products and I can once the production volume ramps Some were into the stabilizer and that they will have a second source. And, of course, we, we clearly we experienced some urgency for an even double ordering. Okay. And, as we said, we, we try to keep a very, very minimal. And just prevent them from lying down the same times and prevent, we prevent them have a carrier carry too much of inventory. I only feel if I answer your questions, maybe. Okay.

Yeah, no, that that's helpful. I guess last quick one for you, Bernie. Do you expect to increase your absolute inventory dollars on hand in the June quarter?

Yeah, currently that's what we're modeling. Yes. Now, again, Michael was careful to add that, you know, this is the supply chain. We have pretty good visibility on the demand. You know, we have to continually try to test and make sure we understand that. So on the supply chain, we are we're looking at continuing to increase the dollar value of inventory. Sequentially in quarters and demand, we just have to continue to reassess. But as Michael also said, our time horizon has more to do on the demand front over the next 15 to 18 months, as opposed to anything that we're concerned about in the next quarter to.

Got it. Thank you.

Our next question is from Kevin of Rosenblatt. Kevin, your line is now open.

Hi, guys. Let me echo my congratulations on the quarter. Just a quick one for me. You will you alluded a little to it before. I was just kind of wondering how your MPS now service and e-commerce business did this quarter and how that compares to last quarter, which I believe also had some pretty strong growth. I'm just kind of looking a little further out as things start to open back up. Do you think that business will take a pause?

I don't think it's a business taking a pause. And I mean, we just started. That would be very upsetting if it's a business taking a pause. And if we're taking a pause, I mean, we probably probably well, at this time, we're still learning. It may take a pause. So I mean, and that's something we haven't really figured out. I mean, but so far in the last three hours, we've been able to take a pause. We've been able to take a last four or five quarters. And I mean, and the measurements that we in that way in place, that we put in place and they keep going up and the orders and the interactings and the demand creation, the value for the index for demand create for a demand creations to keep increasing. And I think that they will turn into revenues and that can and the change to a much bigger revenues.

Kevin, if I could add to that a little bit is the e-commerce and the MPS now are just two legs or two aspects of the much larger story of how we transition from a IC company to a solutions provider that also includes providing fully, you know, complete reference designs and a broad array of solutions in all of our different end markets. So this is really proving the longer term model. And while we are still learning and the numbers are still relatively small, we're in the early innings of this. Everything's very encouraging that we're headed in the right direction and onto something that is very sustainable.

Got it. That's very helpful. Thanks, guys.

Thank you.

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

Thanks, Jen. I'd like to thank you all for joining us for the Q1 2021 earnings webinar. I look forward to talking to you again during our second quarter conference call, which will likely be in July. Thank you. Have a nice day.