Monolithic Power Systems, Inc.

The sequential quarterly revenue increase reflected earlier than normal sales of gaming console products. Consumer revenue represented 25.9% of MPS's second quarter 2021 revenue, compared with 25.6% in the second quarter of 2020. Second quarter automotive revenue of $48.7 million increased 8.5% from the first quarter of 2021, primarily due to increased sales of infotainment products. Second quarter 2021 revenue was up 173.9% year over year. Automotive revenue represented 16.6% of MPS's second quarter 2021 revenue, compared with 9.5% in the second quarter of 2020. Second quarter 2021 industrial revenue of $43.3 million increased 8.9% from the first quarter of 2021, reflecting increased sales of products for power source applications. Industrial revenue represented 14.8% of our total second quarter 2021 revenue compared with 14.3% in the second quarter of 2020. Second quarter 2021 communications revenue of $37.5 million was up 3.9% from the first quarter of 2021. Most of this sequential revenue increase was due to higher product sales for networking and wireless applications. Communication sales represented 12.8% of our total second quarter 2021 revenue, compared with 16.2% in the second quarter of 2020. Our sustainable above-market growth is based on the following. We have and are continuously investing in the expansion and diversification of our supply chain. We accelerated the release of advanced products and solutions based on our new technologies. Three, we have gained increased acceptance of our solutions with first tier customers globally. And four, we continue to diversify and support a wider number of end product applications. With our planned capacity expansion in place, And as we release more parts into production, we are well positioned to accelerate our future revenue growth. Moving now to a few comments on gross margin. Gap gross margin was 56.0%, 60 basis points higher than the first quarter of 2021 and 90 basis points higher than the second quarter of 2020. Our GAAP operating income was $60.6 million compared to $46.1 million reported in the first quarter of 2021 and $28.0 million reported in the second quarter of 2020. Non-GAAP gross margin from the second quarter of 2021 was 56.3%, up 50 basis points from the gross margin reported for the first quarter of 2021. and 60 basis points higher than the second quarter from a year ago. The increase in non-GAAP gross margin as a percent of revenue reflected lower proportional overhead costs. Our non-GAAP operating income was $94.9 million compared to $75.8 million reported in the prior quarter, and $53.0 million reported in the second quarter of 2020 representing a 79% year-over-year increase in operating income. Let's review our operating expenses. Our GAAP operating expenses were $103.6 million in the second quarter of 2021 compared with $95.0 million in the first quarter of 2021 and $74.6 million in the second quarter of 2020. Our non-GAAP operating Second quarter 2021 operating expenses were $70.3 million. Up from the $66.2 million we spent in the first quarter of 2021 and up from the $50.7 million reported in the second quarter of 2020. The difference between non-GAAP operating expenses and GAAP operating expenses for the quarters discussed here are stock compensation expense and income or loss on an unfunded deferred compensation plan. For the second quarter of 2021, total stock compensation expense including approximately $885,000 charged cost of goods sold was $32.1 million compared with $28.6 million recorded in the first quarter of 2021. Switching to the bottom line, Second quarter 2021 GAAP net income was $55.2 million, or $1.16 per fully diluted share, compared with $45.4 million, or $0.95 per share in the first quarter of 2021, and $30.2 million, or $0.64 per share in the second quarter of 2020. Q2 non-GAAP net income was $86.5 million, or $1.81 per fully diluted share, compared with $69.5 million, or $1.46 per share, in the first quarter of 2021, and $50.6 million, or $1.08 per share, in the second quarter of 2020. Fully diluted shares outstanding at the end of Q2 2021. were $47.8 million. Now let's look at the balance sheet. Cash equivalents and investments were $672.9 million at the end of the second quarter of 2021, compared to $641.6 million at the end of the first quarter of 2021. For the quarter, MPS generated operating cash flow of about $96.9 million compared with Q1 2021 operating cash flow of $77.1 million. Second quarter 2021 capital spending totaled $39.3 million. Accounts receivable ended the second quarter of 2021 at $77.6 million representing 24 days of sales outstanding. which was six days lower than the 30 days reported at the end of the first quarter of 2021 and three days lower than the 27 days reported in the second quarter of 2020. Our internal inventories at the end of the second quarter of 2021 were $177.3 million, up from the $175.2 million at the end of the first quarter of 2021. days of inventory of 125 days at the end of the second quarter of 2021 were 16 days lower than at the end of the first quarter of 2021. Historically, we have calculated days of inventory on hand as a function of the current quarter revenue. We believe comparing current inventory levels with following quarters revenue provides a better economic match. On this basis, you can see days of inventory of 117 days at the end of the second quarter of 2021 were seven days lower than the 124 days at the end of the first quarter of 2021 and two days lower than the 119 days at the end of the second quarter of 2020. I would now like to turn to our outlook for the third quarter of 2021. We are forecasting Q3 revenue in the range of 309 to $321 million. Gross margin on both a GAAP and non-GAAP basis is expected to include a one-time benefit from a $4 million litigation settler. Including this benefit, GAAP gross margin will be in the range of 57.3% to 57.9%, and non-GAAP gross margin will be in the range of 57.6% to 58.2%. Excluding this one-time event, non-GAAP gross margin will be in the range of 56.3 to 56.9%. Total stock-based compensation expense should be in the range of $31.2 million to $33.2 million, including approximately $950,000 that would be charged to cost of goods sold. GAAP, R&D, and SG&A expenses should be between $104.1 million and $108.1 million. Non-GAAP R&D and SG&A expenses will be in the range of $73.9 million to $75.9 million. Litigation expense should range between $2.3 and $2.7 million. Interest income is expected to range from $1.0 to $1.4 million. fully diluted shares to be in the range of 47.4 to 48.4 million shares. In conclusion, with our planned capacity expansion in place and as we release more parts into production, we are well positioned to accelerate our future revenue growth. I'll now open up 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 Svanberg of Stiefel. Tori, your line is now open.

Yes. Thank you, Michael. Bernie, congrats again on another strong and record quarter. I was hoping you could update us on your capacity plans. You know, I know you've done a pretty good job here the last 18 months. Your inventory seems to be in good shape, perhaps a bit at the lower end. But, yeah, maybe you could help us understand a little bit more what you specifically are doing on the capacity side.

Thanks, Tori. Our capacity is, as always, in the past three or four years, and we keep expanding. And now we continue that. However, we do have capacities of over $2 billion before the middle of next year. So we have enough capacity for us to grow. And then now we have just qualified more product and released to our productions and ultimately in our customers' hand.

And at the expense of repeating ourselves, Tory, you recall that last year we brought up a 12-inch fab And this year, we've brought up an 8-inch fab, which is already contributing to inventory. So in both cases, what we're continuing to do is expand out by qualifying more parts so that we will be able to meet the $2 billion level by the middle of next year.

Very good. Thank you for that. And your cash balance has doubled here the last couple of years, right? And it's now at 670 million. Obviously, it's a luxury issue to have. But what do you intend to do with that cash? Because obviously, you know, you don't need that much. So, you know, do you plan to return it more back to shareholders? Are you potentially looking at M&A? And, you know, the reason I'm asking this is because it's so high now, right? I mean, I know historically you've grown your business organically, but it's so high now that I I just have to ask the question what you intend to do with it.

That's a good question. As a company, I keep saying we're transforming the company from a semiconductor to more solution providers. And so we can utilize the cash much better than we can in the past. And the strategy is still, okay, we will buy in a tucking technology companies, which comparable to NPS revenues, NPS as a general market coverage. So on the other hand, we are also consistently raising dividend. And that's our strategy, but we are not excluding buyback shares.

Great. Thank you very much. I'll be disciplined and jump back in line. Thank you.

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

Hey, guys. Hope you can hear me, but let me echo my congratulations on the strong revenue and the very nice gross and operating margins. Bernie, I guess you teased us there at the end of your script saying that you've got the capacity now to support an acceleration in revenue growth if I look at revenue last year, you did about 35% growth. Looks like this year you might do better than that. I'm just trying to interpret when you talk about an acceleration in revenue growth, what should we read into that?

Yeah, I think that you're familiar with our model, which is to outperform the industry by 10 to 15 percentage points. And, you know, obviously that's a model. That's a guideline. And there are certain periods where we have the right factors, both strategically as well as from a market perspective, that have allowed us to do better and sometimes not as well as that model. So, for example, if you look at last year's results, you could argue that at 34.5% growth, that we exceeded the market, which was right about 5% to 8%, depending on what you're looking at, by somewhere in the neighborhood of 15, 17 percentage points. And so we look at that as well above our model. In the current year, obviously, we only guide to Q3. But it's not unrealistic to expect that within the range of possibilities that we could match that performance or, in fact, do just a little bit better. So what we're trying to observe here is that in this two, three-year period, we're actually benefiting from a lot of factors that have us exceeding what our normal model is.

Great. Thanks for that additional color. Bernie, I also wanted to ask, on the compute and storage business up 30% sequentially, I think you mentioned that it was share gains in both servers as well as notebooks. On the notebook side, I thought you already had pretty high share at the high end of the notebook market, so I'm wondering if you – Good comment. Are you starting to see share gains in maybe more mainstream or even low-end or Chromebooks on the notebook side? And is there any notable areas of share gains on servers? Thank you.

Yes, we do have some share gain across the board in the notebook market segment. As our technologies advance and which lower the cost, our die size become much smaller. So the cost, the lower cost allow NPS enters lower notebooks segment.

And then as far as server, you know, we've been fairly consistent in articulating our strategy as far as being able to grow our market position with each succeeding next generation, particularly Intel and AMD products. Not limited to that, though, but also on 48-volt and GPUs. So it really expresses the point that We're branching up in share gains within the Intel family, but also branching out into these other opportunities.

Great. Thank you, and congrats again.

Thank you.

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

Thank you, and I'll add my congratulations. You guys just kind of keep amazing everybody, I think. So I'll ask one more capacity question, if that's okay. And it's coming from a spending kind of standpoint. You know, can you, Bernie, maybe remind us what the outlook for kind of spending, just as a general rule, as a percent of revenue is? maybe starting next year once all the new capacity is installed. And I mean, I think you're getting so many questions because everybody sees the kind of growth you guys are putting up. And it's awesome that you have 2 billion in capacity, you know, on board by this time next year. But, you know, at this rate, it's only in a couple of years, right, where you're going to be bumping your head on by. So I'm curious because, you know, how soon would you have to look to begin ramping incremental capacity again and And what might, you know, what might impact me on spending? You know, I'm curious what, like, just hypothetically, you know, in two years, three years' time, if you're at $2 billion top line, like, what would gross margin look like, for instance?

Greg, thank you, and a good question. Something that's really important to comment on here is that a lot of companies and a lot of analysts and a lot of investors are focused on capacity as if this is a – a new aspect of the semiconductor business. In fact, capacity is something that we have been managing for, you know, the 10 years that I've been here and before that. It's an integral component to our growth strategy. And so, the way that we've been doing it is sequentially adding new fabs and also assembly houses and testing capacity alongside of that to accommodate, to be in front of what are expected revenue growth. So while we have made a public comment on the FABs that we've invested in to date, we're still continuing on with ongoing relationships in order to secure more FAB capacity for the future in order to accommodate that growth beyond $2 billion.

Yeah. As I said earlier, we keep expanding. We will never stop. But sometimes faster, other times slower. Other than the capacities, physical capacity itself, we have to increase a lot of headcounts. And the NPS is very, very lean. And so we will hire now. We are hiring a lot of people.

Thanks. Sorry, I was having some trouble on my end. Thanks, Michael, and thanks, Bernie. Quick question on auto, if I could. I mean, by my math, it's on track to maybe grow sort of in the 80% or better range this year for you guys. I mean, I'm curious how much of that is being either directly or indirectly limited by supply. And if you could give a sense of what growth could be or talk about demand that's pushed and how that ultimately would show up in the model, say, next year? I don't know if you could maybe quantify or talk about your auto backlog and maybe where it is today.

Maybe Bernie can. This year, you mentioned whether the automotive product is limited by the capacities and the And the answer is it's not as much as other segment because automotive company, they give us a long lead times. And so we prepare the last year. The last year, our customer didn't consume that many of our products. And so it all translated to this year. And so we'll be able to ship them now.

One of the aspects of automotive that's getting a lot of attention in the press has to do with the fact of electronic component shortages that are shutting down plants or limiting their ability in order to kit a car and assemble it. And as Michael just said, we're actually not capacity constrained there. We are meeting all demand from them. And what's been interesting is one of the reasons that automotive got into this bind is because they were working with a just-in-time inventory model. And I think that they've learned from that that when the parts, the electronic components are available, that they will stock them even though they don't have a complete kit to build the car. Now, in our conversations and feedback that we're getting is they're actually only trying to satisfy real demand, but that is the timing of when the build plan, when they'll have, you know, the complete kit that they can then build the cars. So it's something that we want to monitor because there's been no change in the ordering pattern or shipment schedule versus expectations because of the other limitations in automotive.

I might as well add it. About a year and a year and a half ago, our inventory was at an all-time high. And that was one of the reasons why we do that. Because we are a newcomer in automotive industries. Even though with this type of current revenue, we are still very, very little on the market today. percentage of a market. And so it's clear as a newcomer and you don't want to upset the customers and you don't have a product. So as all these, like what we do to all these key customers, we have inventory, even though they don't have a clear forecast. And So now it's really benefited us and we gain a lot more design wing activities. And because our competitor could not ship a product.

Thanks for the color. Okay. All right.

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

Great. Thanks for taking my question. I hope you can hear me. With regard to first sort of a maintenance question, with regard to your capacity and inventory, which you've already explained quite a bit about on this call, are you supply constrained at this time? Are you able to meet all the demand, whether it's upside or down? maybe customers stretching and trying to build a bit of inventory? Or are you, in fact, capacity constrained and are lead times extended as you're communicating them to customers? And then I have a bigger question, a more sort of strategic question after that.

Yeah, let me explain that way. We have a less capacity constraint than I compare like a half year ago. Also, however, as a customer, after you qualify all these new FABs, and we have a couple months delay of qualifying these products. And to qualify in a FAB, it's not exactly science. I mean, you use a different supply, different equipment, okay, and different materials. And all the problem, all these issues comes to have an effect on how you qualify products in the end. So at this time, okay, we just have to release a lot of new product, not an existing product from a different fabs. So it's kind of a, to answer your question, yeah, it's that kind of a constraint. We have a lot more orders, and we couldn't fulfill, and that gave me, but just only a couple of months late.

And again, what we're trying to do here is make sure that we're servicing real demand and not building up inventory either in the channel or on our customer shelves. So what we've done is we've actually – have very transparent relationships with our customers so that we make sure that we're in touch with their business sufficient to be able to make those trade-offs.

Great. Thanks. And then the follow-up, if I can, or the more strategic question. Michael, you referred to this transition from a semi-company to a technology transition. solutions company, and it's something I've written about, about specifically the transition from semi-devices to modules. Any quantification around this, and perhaps it relates to the e-commerce strategy as well? Any update in that area would be very helpful. Thank you.

Yeah, thanks for asking for that question. Now it's overwhelming by the revenue growth and the company, but not only from analysts, from outside, the company, inside companies, overwhelming by the revenue growth, the allocations, and the product allocations, and the and a lot of strategic things, and I can be as less pronounced than that. But the module, you're absolutely right. Module business is for a solution, as a solution, transforming to a module company as we transforming, we're transitioning from a semiconductor to a solution company. And The e-commerce, we have teams, and we finally, we have organized like a product line. And I know the activities, and in the last quarter or so, it's quadrupled. And So the revenue is still small, but it's in the millions of dollars. It's more than a million dollars. It's somewhere 30, 40 million dollars. With the modules and services. Yeah, with the modules and the services. And it's growing. As I recall, about five years ago, three years ago, it's almost zero. Yeah. And four years ago, almost zero, then I came here and we started that. And so we will continue to focus on that. And so I truly believe that that's our future.

Thanks and congrats. Thank you.

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

guys congrats on the results and thanks for taking my question um gross margins in both the print and the guide were meaningfully higher than your usual 10 to 20 basis point trajectory can you elaborate on the key drivers of the leverage there and i guess speak to the sustainability was it driven by mix or something on the cost side getting wafers through uh recently around fabs x

Sure. I think that we've discussed in the past that, again, it's our model is that we want to be able to grow gross margin at 10 to 20 basis points sequentially over the long haul. And we've demonstrated very good consistency in being able to do that. But much like I was describing before, this is an unusual period of growth for the company, both in terms of how fast the revenue is growing. And then obviously, as we described in the narrative, it was that the overheads is not what you'd be like direct spending or inventory provisions or anything like that is not growing at the same rate as the revenue growth. And that's where we're getting the near-term leverage. As we look out, obviously, we don't want to create an expectation that we're going to be able to grow at the same rate. But by the same token, we have established another floor level for what we expect sustainable gross margin to be.

That's helpful, thank you. And then also on the model, I guess, you mentioned that consumer in consoles was a bit accelerated versus your normal seasonality. Can you remind us what you would expect the shape of the console business to look like in the second half and maybe just give us some clues on revenue growth by segment? Thank you.

Sure.

Oh, go ahead. I don't know if you call it normal. I can't think of a normal anymore. Regarding to a console business, yes, we want a lot of design and we want the next design. I think the business continues. I think you have a better judgment than us. What's the seasonality now for a console?

I think that Michael makes a very strong point there is that we've had so many puts and takes and different lines of businesses that have been added that the rule of thumb is not as applicable as it might have been back in 2018 or 2019. What I would comment on is that we believe that we are optimizing across all of our different end markets. And again, it's really the strength of the model is in the diversification. And whereas a lot of the traditional seasonality would have been tied to consumer, for example, now we have a much higher percentage or a business that is tied to computing, automotive, and industrial, and they don't necessarily recognize the same level of seasonality. But then to sort of complete the question, I think if you look at the near-term growth, you know, obviously the current year has benefited significantly from automotive and compute and storage in particular, and we believe that going forward, automotive, along with communications, should be our longer-term drivers.

Understood. Thanks, guys.

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

Yeah, thank you. I just have a few follow-up questions. First of all, I have a question on your ASPs, which is obviously tied to your revenue growth. So, you know, now that you are sort of growing the 50% range, how much of that is units versus ASPs?

Yeah, I would say if you look at last year, and last year is representative of what we're doing in 2021, is of the 34.5% growth, 25% that was tied to volume, 10% was tied to price. And I think when Michael talks about the solutions business, you're looking at previously selling an individual piece of silicon for 20 to 25 cents. And now, depending on the module, we can get between one to three dollars. And what we're looking to be able to do is design complete integrated solutions for different end applications. where those will be able to achieve, you know, for the total cost for that solution can be somewhere between $60 to $100. So there's the ASP on the individual component, but it's more importantly, it's having that attach rate with the total solution.

Very good. And talking about systems, how's your motor business doing? I know that's probably the highest ASQ products you have. So how's that business going?

It's doing well, but the rest of the companies grow much faster. So it's still small. And you can't break out a percentage yet. But I think that we will more – have a given more category of our product growth, okay, as we divide it into a more finer product line. Yeah, we'll give that number later. Sounds good, Michael.

And last one, about a year ago, you talked about getting into the medical end market. Any updates there? I mean, I know it's still probably very, very small as percentage of revenue, but Just trying to understand how fast your traction is in the medical market.

Yeah, okay. We have our product now, and that's, well, we have several things. We have ultrasound, and the ultrasounds, we do generate revenue. We see the revenue now. The other one is x-ray machines, x-rays, and x-rays. we're evaluating the first silicones from our design size of florists, but we have some issue with the fat. But that's a very minor issues. And I mean, we'll be able to solve that problems. And it is outstanding. Thank you for bringing it up. And the performance is like a five, six SX better than existing solutions. So the image is a lot more cleaner now. And we could deliver. And so... I think the customers are waiting, and we're very excited.

One other comment to add here is the technology that we're referring to here is related to our high performance or precision analog. Data converters.

Data converters, right.

And this has been something that we've been working on for, I think, about two and a half, three years now. Two and a half years? Two and a half years. And I think what is really exciting is that this is a – incredible opportunity, and we're very close to being able to declare that it's commercially viable in the market. So it's not just the medical, which is the first end market that we're going after with this technology, but the other opportunities this opens up for us.

Yeah, it's the same technologies, similar technologies that we'll be able to use in a telecommunication site.

Sounds good. Congrats again on the stellar results. Thank you so much. Thank you.

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

Hi, guys. Congrats on the quarter, and thanks for taking my question. Just a quick one for me. I was wondering if you could tell us what percentage of your business or percentage of backlog is based on three-year or newer products. I think last quarter, Bernie, you had said new products introduced in the last three years were about 37% of sales. So just kind of wondering if this was in the same range this quarter.

Yeah, the reason that we used that step on sort of a one-time basis was to really give an order of magnitude to just how dynamic this new product introduction is as a component to our growth. So, you know, right now, obviously, in such a short one-quarter term, it hasn't changed a whole lot up or down. But it's really not something that we want to be reporting on on an ongoing basis.

Yeah. I think the last time we reported, is that 37%? Yeah. I actually went back and looked at it and was surprised. we actually cannibalize ourself. And I think that's a better way. Okay, rather than other big guys to eat us. And I think that we cannibalize quite a bit. And I think somewhere it's a 10% range. Okay, all these new product, we cannibalize it. And that's why the number is so high today.

But I would say that when there's cannibalization involved, you can bet that for market share gains against our peer companies, that that's really the leverageable part of this story.

Got it. That's helpful. Thanks, guys. Thank you.

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

Hey, guys, just wanted to follow up on Josh's question on gross margins. I know in the near term, better overhead absorption is driving the better margins. But if you guys have access to capacity and most of your competitors are getting strained, I'm wondering, is there any room for you to get a little bit more to raise pricing in certain segments? to take advantage of that capacity support, or will you just continue to, you know, kind of put your foot on the pedal and, you know, try to drive as much revenue through that additional capacity support rather than trying to do it through pricing?

Well, yeah, NPS is still a smaller, the smallest analog semiconductor business. And we, okay, and NPS, at the same times, we wanna deliver a consistent result. And so now you see the margin, even in this period, we don't fluctuate a lot because we just pass on our cost to our customers. And we don't randomly just raise because we can now the shortage, we can gouging a price, okay? And that will affect the long-term relationship with our customers. And so we just maintain that and maintain the margins, okay? I think this strategy fits everything, fits for us, okay?

Got it. Thank you.

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.

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

Have a nice day.