Monolithic Power Systems, Inc.

Welcome, everyone, to the MPS third 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 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 Q3 2021 financial results and guidance for Q4 2021, 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 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 Q3 2021 earnings release and in our SEC filings, including our Form 10-K filed on March 1, 2021, and our Form 10-Q filed on August 9, 2021, which are accessible through our website, www.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 the 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 2020, Q2 2021, and Q3 2021 releases, as well as to the reconciling tables that are posted on our website. Now, I would like to turn the call over to Bernie Blagan.

Thanks, Jen. MPS achieved record third quarter revenue of $323.5 million, 10.3% higher than revenue in the second quarter of 2021, and 24.7% higher than the comparable quarter in 2020. Looking at our revenue by market, third quarter 2021 industrial revenue of $52.2 million increased 20.5% from the second quarter of 2021, due primarily to increased revenue for industrial meters and power sources. Industrial revenue represented 16.1% of our total third quarter 2021 revenue. Third quarter 2021 communications revenue of $44.7 million was up 19.3% from the second quarter of 2021, primarily due to increased infrastructure demand. Communication sales represented 13.8% of our total third quarter 2021 revenue. In our computing and storage market, third quarter revenue of $98.6 million increased $10.9 million or 12.4% from the second quarter of 2021. The sequential quarterly revenue growth primarily reflected sales gains in storage applications. Computing and storage revenue represented 30.5% of MPS's third quarter 2021 revenue. Third quarter automotive revenue of $54.4 million grew $5.7 million, or 11.7%, over the second quarter of 2021. This improvement reflects continued gains in applications for infotainment, lighting, and ADAS. Automotive revenue was 16.8% of MPS's total third quarter 2021 revenue. In our consumer markets, third quarter 2021 revenue of $73.6 million fell 3.3% from revenue reported in the second quarter of 2021. This decrease in consumer revenue reflected lower handset sales. Consumer revenue represented 22.8% of our third quarter 2021 revenue. Third quarter 2021 gap gross margin was 57.6%, which was 160 basis points higher than the second quarter of 2021 and 245 basis points higher than the third quarter of 2020. Non-GAAP gross margin for the third quarter of 2021 was 57.8%, 148 basis points higher than the gross margin percentage reported from the second quarter of 2021 and 231 basis points higher than the third quarter from a year ago. Third quarter 2021 gross margin on both a GAAP and a non-GAAP basis included a $4 million litigation settlement Excluding this one-time benefit, non-GAAP gross margin would have been 56.6%, essentially flat with the second quarter of 2021 and 110 basis points higher than the third quarter of 2020. Our GAAP operating income was $77.1 million compared to $60.6 million reported in the second quarter of 2021 and and $60.0 million reported in the third quarter of 2020. Our third quarter 2021 non-GAAP operating income was $108.4 million compared to $94.9 million reported in the prior quarter and $84.9 million reported in the third quarter of 2020. Let's review our operating expenses. Our GAAP operating expenses were $109.2 million in the third quarter of 2021, compared with $103.6 million in the second quarter of 2021 and $83.1 million in the third quarter of 2020. Our non-GAAP Third quarter 2021 operating expenses were $78.7 million, up from the $70.3 million we spent in the second quarter of 2021 and up from the $59.1 million reported in the third quarter of 2020. The sequential increase in Q3 non-GAAP operating expenses primarily reflected in increased spending in R&D for qualifying parts for production and securing foundry capacity. The differences between non-GAAP operating expenses and GAAP operating expenses for the quarters discussed here are primarily stock compensation expense and an income or loss on an unfunded deferred compensation plan. For the third quarter of 2021, total stock compensation expense, including approximately $922,000 charged cost of goods sold, was $31.6 million, compared with $32.1 million recorded in the second quarter of 2021. Switching to the bottom line, third quarter... 2021 GAAP net income was $68.8 million, or $1.44 per fully diluted share, compared with $55.2 million, or $1.16 per share in the second quarter of 2021, and $55.6 million, or $1.18 per share in the third quarter of 2020. Q3 non-GAAP net income was $98.6 million, or $2.06 per fully diluted share, compared with $86.5 million, or $1.81 per share in the second quarter of 2021, and $79.4 million, or $1.69 per share in the third quarter of 2020. Fully diluted shares outstanding at the end of Q3 2021 were $47.9 million. Now let's look at the balance sheet. Cash equivalents and investments were $744.5 million at the end of the third quarter of 2021 compared to $672.9 million at the end of the second quarter of 2021. For the quarter, MPS generated operating cash flow of about $117.8 million, compared with Q2 2021 operating cash flow of $96.9 million. Third quarter, 2021 capital spending totaled $18.6 million. Accounts receivable ended the third quarter of 2021 at $79.9 million, representing 22 days of sales outstanding, which was two days lower than the 24 days reported at the end of the second quarter of 2021 and 11 days lower than the 33 days at the end of the third quarter of 2020. Our internal inventories at the end of the third quarter of 2021 were $208.1 million. Up $30.8 million from the $177.3 million reported at the end of the second quarter of 2021. Inventory at the end of the third quarter of 2021 represented 134 days, which were nine days higher than at the end of the second 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 the following quarter's revenue provides a better economic match. On this basis, you can see inventory at the end of the third quarter of 2021 represented 135 days, 18 days higher than the 117 days at the end of the second quarter of 2021, and six days higher than the 129 days at the end of the third quarter of 2020. Currently, our inventory levels remain 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 our outlook for the fourth quarter of 2021. We are forecasting Q4 revenue in the range of $314 to $326 million. We also expect the following. Gap gross margin in the range of 56.0 to 56.6%. Non-gap gross margin in the range of 56.3 to 56.9%. Total stock-based compensation expense of $30.8 million to $32.8 million, including approximately $950,000 that would be charged to Cost of Goods Sold. GAAP R&D and SG&A expenses should be between $107.8 million and $111.8 million. Non-GAAP R&D and SG&A expenses to be in the range of $77.9 million to $79.9 million. Litigation expenses expected to be in the range of $3.5 million to $3.9 million. Interest income is expected to range from $1.0 million to $1.4 million, fully diluted shares to be in the range of 47.9 to 48.9 million shares. In conclusion, we are continuing to execute our strategy. I will 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 of Stiefel. Tori, your line is now open.