Monolithic Power Systems, Inc.

everyone to the MPS second quarter 2022 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 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 Q2 earnings release and in our latest 10-K and 10-Q filings that can be found on 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, other income, income before income taxes, 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 Q2 2022 earnings release, which we have furnished to the SEC and is currently available on our website. Now, I'd like to turn the call over to Bernie Blagan,

Thanks, Jen. MPS achieved record second quarter revenue of $461.0 million, 22.1% higher than the first quarter of 2022 and 57.2% higher than the second quarter of 2021. This broad-based year-over-year revenue growth was a result of consistent execution against our strategies. Turning now to the second quarter 2022 revenue by market. In our enterprise data market, second quarter 2022 revenue of $65.2 million increased 53.4% from the first quarter of 2022, primarily due to an accelerated ramp in our data center and workstation computing sales. Second quarter 2022 revenue was up 117%. 0.9% year over year. Enterprise data revenue represented 14.2% of MPS the second quarter 2022 revenue compared with 10.2% in the second quarter of 2021. Storage and computing revenue of $122.3 million increased 26.6% from the first quarter of 2022. The sequential revenue improvement reflected higher commercial notebook and storage sales. Second quarter 2022 revenue was up 111.6% year over year. Storage and computing revenue represented 26.5% of MPS's second quarter 2022 revenue compared with 19.7% in the second quarter of 2021. Second quarter consumer market revenue of $97.3 million increased 21.7% from the first quarter of 2022. The sequential quarterly revenue improvement was broad-based, with particular strength noted in home appliances and gaming. Second quarter 2022 revenue was up 27.9% year over year. Consumer revenue represented 21.1% of MPS's second quarter 2022 revenue, compared with 25.9% in the second quarter of 2021. Second quarter 2022 industrial revenue of $55.9 million increased 15.1% from the first quarter of 2022, reflecting increased sales of products for power source and security applications. Second quarter 2022 revenue was up 28.9% year over year. Industrial revenue represented 12.1% of our total second quarter 2022 revenue compared with 14.8% in the second quarter of 2021. Second quarter automobile revenue of $61.0 million increased 11.9% from the first quarter of 2022. Primarily, due primarily to increased sales of applications for advanced driver assistance systems, the digital cockpit, and lighting products. Second quarter 2022 revenue was up 25.3% year over year. Automotive revenue represented 13.2% of MPS's second quarter 2022 revenue, compared with 16.6% in the second quarter of 2021 revenue. Second quarter 2022 communications revenue of $59.3 million was up 6.7% from the first quarter of 2022. Most of this sequential revenue increase was related to 5G infrastructure. Second quarter 2022 revenue was up 58.3% year over year. Communication sales represented 12.9% of our total second quarter 2022 revenue compared with 12.8% in the second quarter of 2021. Moving now to a few comments on gross margin. GAAP gross margin was 58.8%, 90 basis points higher than the first quarter of 2022 and 280 basis points higher than the second quarter of 2021. Our GAAP operating income was $141.9 million compared to $96.1 million reported in the first quarter of 2022 and $60.6 million reported in the second quarter of 2021. Non-GAAP gross margin for the second quarter of 2022 was 59.0%, up 70 basis points from the gross margin reported for the first quarter of 2022 and 270 basis points higher than the second quarter from a year ago. The quarter-over-quarter and year-over-year increases in both GAAP and non-GAAP gross margin is attributed largely to operational efficiency gains and a more favorable sales mix. Our non-GAAP operating income was $179.4 million compared to $133.6 million reported in the first quarter of 2022. Let's review our operating expenses. Our gap operating expenses were $129.1 million in the second quarter of 2022 compared with $122.7 million in the first quarter of 2022 and $103.6 million in the second quarter of 2021. Our non-GAAP second quarter 2022 operating expenses were $92.7 million, up from the $86.6 million we spent in the first quarter of 2022 and up from the $70.3 million reported in the second quarter of 2021. The differences between non-GAAP operating expenses and GAAP operating expenses for the quarters discussed here are primarily stock compensation expense and income or loss on an unfunded deferred compensation plan. For the second quarter of 2022, total stock compensation expense, including approximately $1.2 million charged to cost of goods sold, was $42.9 million, compared with $39.8 million recorded in the first quarter of 2022. Our second quarter 2022 gap other income, other expense, was $5.1 million compared with $634,000 in the first quarter of 2022. Our second quarter 2022 non-GAAP other expense was $7,000 compared with non-GAAP other income of $1.6 million in the first quarter of 2022. The decrease is due to a $2 million increase in charitable contributions, partly offset by the favorable impact of currency exchange rates. The difference in non-GAAP other income and GAAP other income is the income or loss on an unfunded deferred compensation plan. Switching to the bottom line, second quarter 2022 gap net income was $114.7 million, or $2.37 per fully diluted share, compared with $79.6 million, or $1.65 per share, in the first quarter of 2022, and $55.2 million, or $1.16 per share, in the second quarter of 2021. Second quarter 2022 non-GAAP net income was $157.0 million or $3.25 per fully diluted share compared with $118.3 million or $2.45 per fully diluted share in the first quarter of 2022 and $86.5 million or $1.81 per share per fully diluted share in the second quarter of 2021. Fully diluted shares outstanding at the end of Q2 2022 were $48.3 million. Now let's look at the balance sheet. Cash equivalents and investments were $814.1 million at the end of the second quarter of 2022, compared with $775.9 million at the end of the first quarter of 2022. For the quarter, NPS generated operating cash flow of approximately $105.2 million compared with Q1 2022 operating cash flow of $107.4 million. Accounts receivable ended the second quarter of 2022 at $125.5 million, representing 25 days of sales outstanding, which is four days lower than the 29 days reported at the end of the first quarter of 2022 and one day higher than the 24 days in the second quarter of 2021. Our internal inventories at the end of the second quarter of 2022 were $359.6 million, up from the $311 million at the end of the first quarter of 2022. Days of inventory of 172 days at the end of the second quarter of 2022 were six days lower and at the end of the first quarter of 2022. Historically, we have calculated days of inventory on hand as a function of current quarter revenue. We believe comparing current inventory levels with the following quarters revenue provides a better economic match. On this basis, you can see days of inventory of 162 days at the end of the second quarter of 2022, which were 13 days higher than the 149 days at the end of the first quarter of 2022. and 44 days higher than the 118 days at the end of the second quarter of 2021. I would like now to turn to our outlook for the third quarter of 2022. We are forecasting Q3 revenue in the range of $480 to $500 million. Gap gross margin in the range of 58.4 to 59.0%. Non-GAAP gross margin in the range of 58.7 to 59.3%. Total stock-based compensation expense in the range of $42.8 million to $44.8 million, including approximately $1.3 million that would be charged to cost of goods sold. GAAP R&D and SG&A expenses between $136.2 million and $140.2 million. Non-GAAP R&D and SG&A expenses in the range of $94.7 million to $96.7 million. Litigation expense in the range between $2.3 and $2.7 million. Interest and other income in the range from $1.3 to $1.7 million before foreign exchange gains or losses. Fully diluted shares in the range of $47.9 to 48.9 million shares. In conclusion, we are continuing to execute on our growth strategies, including expansion and diversification of our R&D centers and manufacturing partnerships in multiple countries. 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 is from Rick Schaefer of Oppenheimer. Rick, your line is now open.