Monolithic Power Systems, Inc.

Welcome 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 .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 CSO. 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 10K and 10Q filings that can be found on 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, other income, income before income taxes, 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 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 Blagen.

Thanks Jen. MPS achieved record second quarter revenue of $461.0 million, .1% higher than the first quarter of 2022 and .2% higher than the second quarter of 2021. This broad-based -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 .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 .9% -over-year. Enterprise data revenue represented .2% of MPS to second quarter 2022 revenue compared with .2% in the second quarter of 2021. Storage and computing revenue of $122.3 million increased .6% from the first quarter of 2022. The sequential revenue improvement reflected higher commercial notebook and storage sales. Second quarter 2022 revenue was up .6% -over-year. Storage and computing revenue represented .5% of MPS' second quarter 2022 revenue compared with .7% in the second quarter of 2021. Second quarter consumer market revenue of $97.3 million increased .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 .9% -over-year. Consumer revenue represented .1% of MPS' second quarter 2022 revenue compared with .9% in the second quarter of 2021. Second quarter 2022 industrial revenue of $55.9 million increased .1% from the first quarter of 2022. Reflecting increased sales of products for power source and security applications. Second quarter 2022 revenue was up .9% -over-year. Industrial revenue represented .1% of our total second quarter 2022 revenue compared with .8% in the second quarter of 2021. Second quarter automobile revenue of $61.0 million increased .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 .3% -over-year. Automotive revenue represented .2% of MPS' second quarter 2022 revenue compared with .6% in the second quarter of 2021. Second quarter 2022 communications revenue of $59.3 million was up .7% from the first quarter of 2022. Most of this sequential revenue increase was related to 5G infrastructure. Second quarter 2022 revenue was up .3% -over-year. Communication sales represented .9% of our total second quarter 2022 revenue compared with .8% in the second quarter of 2021. Moving now to a few comments on gross margin. Gap 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 gap 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-gap 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 -over-quarter and -over-year increases in both gap and non-gap gross margin is attributed largely to operational efficiency gains and a more favorable sales mix. Our non-gap 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-gap 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-gap operating expenses and gap 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 non-gap second quarter 2022 gap other income expense was $5.1 million compared with $634,000 in the first quarter of 2022. Our second quarter 2022 non-gap other expense was $7,000 compared with non-gap 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-gap other income and gap 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-gap 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, MPS 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 than 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-gap 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. Gap, R&D, and SGNA expenses between $136.2 million and $140.2 million. Non-gap, R&D, and SGNA 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.

Thanks. And congratulations, you guys. Another great quarter. This may seem like a silly question given the guidance, but I'm just curious. Are you seeing any impact from the delayed launch of Sapphire Rapids? I mean, I know your accelerator content is a lot higher than your CPU core power content. I think 48 volt, and please correct me if I'm wrong, I think our math shows 48 volt tracking to sort of $100 million this year. So I guess I'm just looking at sort of the puts and takes. I know this is pretty much a monster guide, but I'm just curious if you were seeing any drag there from that delayed launch.

So far, we see for the next year or so, all our growth is, as you know, these are all green fields. We don't, all the products that we designed in the last few years, for whatever the version of it. So if it's delayed, one thing is that we actually care less. It's out of NPS controls. But overall, we have a higher power processor, and NPS can provide much higher benefit to those market segments. So it's all for about half a year, and we don't notice it in this period. And we gain more market shares, and we grow from, there's existing business, and we have plenty of it to grow.

Thanks a lot, Michael, for the color. And if I could follow up maybe on the supply question, you know, majority of your wafer supply is still in China. You know, plus you've got your big Chengdu back-end facility. So I guess, how concerned are you with trying to de-risk, you know, supply chain as we keep watching headlines with the U.S. government and trying to tighten restrictions, etc. on equipment and everything in China? So just curious, your thoughts there. And maybe as part of that, if you could talk about where things stand now with TSMC and give a sense maybe of timing and capacity. I think we have some plans there. Thanks.

Yes. Just like any other companies, clearly we're transitioning from the last 20 years of manufacturing from China to other places. And all these infrastructure had to be built up. And we're just like other companies. We're in the transitions. Actually, we started transitioning earlier. We first started from our engineering manpower. We transitioned out of six, seven years ago. Six years ago. And the manufacturers, we started like two, about three years ago. And as you know, we always use the trading edge of DRAM fabs, or digital fab. And three or four years ago, clearly, these higher nodes, like 60 nanometers and 40 nanometers, they're all engaged with the NPS. And as we have a reputation, we will fill up all these fabs. And now it opens up in careers and in Taiwan and these other places now. We're only talking about fabs at this one now. And in the next few years, we'll be, I can't say, move out of China. And we're still in bigger capacities. And we have a large market segment in our 30% of our revenues still from China. So in the next year or couple years later, next year, we probably will be very diversified.

And just to add to that, as the capacity restrictions are becoming less of a concern for the market in general, customers are asking for diversification as in a China plus one strategy. So we're working along those lines in companion to expanding our overall capacity.

They all require, each region's required their local supply. That's what we play in the games. And that's our customer request. And so we're fully aware of that. And so we engage with all these fabs across South Asia and Europe and Korea and Japan. And so that's how I see it.

Thanks a lot for the color. Congrats, Ken.

Our next question is from Matt Ramsey of Cohen. Matt, your line is now open.

Thank you very much, guys. Hopefully you can hear me. Congratulations on the results. So I had two questions and I'll just go ahead and ask them both at the same time because I think we got multiple calls going tonight. The first one, Michael, both in the server business, so the new enterprise data segment and in the PC business, can you give us some indication of how far ahead of the unit sales to your power, your core CPU power or accelerator power products actually sell in versus the unit shipments that they get reported by the end customers? And Bernie, the second question, completely unrelated, like 800 million bucks in cash, give or take. If you could kind of walk us through some of the uses of cash there, I'm sure Michael would like to build some inventory, which is kind of always the case. But if you have any new things to say there, that'd be really helpful. Thanks, guys.

Well, first question, honestly, I don't really know. It's difficult. And as you know, we sell, these are building blocks. And for more or less in the server and data centers areas. And these are more generic parts and they can be used multiple ways. And it's hard to track. And frankly, we don't really care. As long as our revenue goes up. For very high powers, and these are powers like 48 volts of power, we do have pretty good dominant players in that segment. And so I think the ramp hasn't really just started recently. And in the future, there will be a lot more. But you mentioned about notebooks. We're mostly in high performance gaming, mostly in the commercial notebook. And number of sets versus the CPUs is also hard to match. Because we selling these are power devices, they can be two-phase, they can be three-phase, they can be four-phase. We don't quite know. And also we care less. So it's difficult to answer. So all these notebooks are the high-end gaming side and the gaming notebooks and the commercial. So these are the ones that have a variety of use.

And on the issue as far as our cash position, which let's put it on the table, it's sort of an enviable position to have over 800 million of cash and cash equivalents. And there's probably three things that we look at. The first is we've been consistently paying out a routine dividend. This year it's $75 per quarter, $3 for the full year. And we're evaluating the sustainability at an even higher level. We generally announced dividend increases in February, companion with our Q4 operating results. And we'd expect to do so again this year. Another area that we found is very key and strategic to us is building our capacity. And we're looking, as Michael said earlier, for different avenues in order to build out additional capacity. And in some cases that may require additional investment. And then finally, as you also added, is working capital, making sure that we have adequate inventory on hand in order to sustain our customers' demand profile. And so right now we're still below our target of 180 to 200 days of inventory. So we'll continue to be investing in inventories as well.

Yeah, I might as well. All these are burning, all the expenses, they are small. Relatively compare the cash that we generate every year. And so what we want to do is, that's probably NPS and all the best, be consistent. And we give an increase in our revenue yearly. And that's what we have been doing in the past few years. And we'll continue to do so. And also we will do some acquisitions, but not acquisition for revenues.

Our next question is from William Stein of Truist. William, your line is now open.

Thanks for taking my question. Congrats on the great results and outlook. Something I tend to ask about is traction in the module business, because I know that this is something that's helping boost the revenue growth and the margins. I'm hoping that you'll be able to do that. And I'm hoping you can maybe update us on the traction in that business, please.

Yeah, the modules are doing well, but the revenue is still quite small. It's a hundred-some million dollars. But I know the next few years will grow double or triple. And that's what we're seeing in the pipeline, in the design wing activities. So as we said, a few years ago, we do e-commerce and we do programmable modules. These show true benefits to our customers truly realize it in the end.

Yeah, I'd say that particularly as we had this supply-demand imbalance and our customers are also looking for enabling technologies, that the decision process for earning a design win where it historically had been just on the lowest-cost provider, now things like the programmability, the flexibility, the time to market, the total cost of ownership are taking a larger weighting in the decision process. And we feel like we're very strategically positioned to take advantage of that change in the market.

That's great. And as a follow-up, if I can, I'm wondering if you can talk about your lead times now and how they might have changed in the last, I don't know, a couple months and the degree to which that's been a competitive advantage. My understanding is that you're offering lead times that enable customers to switch away from competitors' products that have lead times that are so long that it suddenly makes sense to switch. Any sort of comments or update on that would help a lot. Thanks, guys.

Our lead time really hasn't changed that much and we're still in a lot of delinquencies. That's a good thing because, as Bernie said earlier, all the benefits of our product technologies, finally our customers realize that. It became a high demand. And I think it's due to the new design wing activities and they all switch to this type of new technology or new design methodologies. That really benefits MPS. At the same time, we had to increase our capacities. Not only from China, but globally, that's our customer demand.

And just to top off that answer, I don't think our lead times were necessarily different from anybody else necessarily in the industry, but we had the advantage of having so many new products coming down the market, greenfield opportunities, that we invested ahead of the curve and that's when we were able to have product availability when others didn't.

Thanks, guys.

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

Hey, guys. Congratulations on the nice results. I guess I would love to ask, obviously we've seen some in the compute space, Intel and Micron offering much more subdued outlooks for the second half. I think there's clearly some inventory purge going on in the channel. I'm just wondering, obviously your September guidance is very strong, but as you look at the order book, have you started to see any changes in the notebook or compute and storage and enterprise data center segment that might echo some of the comments we've heard from folks like Intel and Micron in the broader market that I've got to follow up.

For the notebooks, for our side, demand is still pretty good and still good and looking. I think the orders slow down than before. But we still have a delinquency. For memory side, there's a lot of a new format starting. We're still facing some shortages now.

If I could just add to that, we aren't looking at any areas of our business that might be susceptible to either backlog that is canceled or is pushed out. Keep in mind that cancellations are always a part of all semiconductor companies. It's not just a one-time or new event. The fact of the matter is any influence relative to the size of our overall backlog today is very minor. That's what's given us a very confident outlook for the second half. The rate

of booking and cancellation is very similar to the last few years.

No noticeable uptake in cancellations or pushouts, it sounds like, is what you're saying. The second question is just enterprise data showing very strong growth. I think that's going to be one of the biggest drivers for the business over the next couple of years given the Greenfield opportunities. Can you guys size for us, is the accelerator card and 48 volt opportunity larger than the share gain on CPU power? Do you think they're both equally driving the growth and just trying to... What's the biggest driver, do you think, for the enterprise data segment?

I think it's both. Not only the CPU size for the servers and we gained a market share. We stepped into the games a couple of years ago but a very small percentage and we started to ramp but we're still far distance than the bigger suppliers. That's from the server side. The 48 volts, we talk about it since 2017 or 2018. We said that this is the inevitable and a trend. You had to move up to 48 volt. We're now the fourth friend and we're not replacing anybody. We set up this market trend. Also, data center and the rack itself there's a big opportunity. NPS ramping revenue from there. From the AC powers and these are 380 volts and 240 volts input and also the battery backup and we provide the solutions for battery management and also cooling side. So NPS is almost a one-stop shopping place for data center.

Thank you, Michael.

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

Thank you. First one for Michael. You're known for driving a lot of new innovative business models. As we now start to think about adding capacity to get to 4 billion given the geopolitical dynamics of the new business models to try and secure more capacity for your continuous growth.

Well, there's one thing, right? Of course, we had to move out and we will have increased more capacities outside of China. We started about a couple of years ago and we're really engaged with some bigger D-RAM fabs. We will fill that up in the next couple of years. But going to futures, NPS actually requires less semiconductors because a lot of products are more programmable and we can use it for multiple uses. And sometimes we're building revenues and we're selling a lot more than semiconductor. We're selling power solutions, more modules. So we kind of move up the full chance as the new requirement comes in and we play in the market. We're not competing with anybody and we just provide the solutions. So those manufacturers, these are clearly different. They're building modules. We sign up partnerships for assembling these new modules. It's unprecedented. A lot of testing, a lot of qualifications, NPS designed the whole system from the ground up. And so these are the there is no such a facility out there. We had to invent it that

way. And I think just to echo a point there is if you look at our revenue for the quarter we grew 57% and keep in mind that we've had one price increase and that was in February this year for 5%. And so if you actually look at where the source of the revenue growth came from about half of it is volume related and the other half is higher ASDs because of the higher value products that we're selling. So that means that we've differentiated our supply chains who are not just dependent on silicon based products. It's making total solutions.

But the bigger effect that we're really taking place yet that would be a couple of years down the road you will see much bigger effect. So there's a lot of work to do ahead of us. Particularly these are new types of modules nobody else has built that kind of thing. We're ground up, we developed and we even developed the manufacturing and the testing, the qualifications part of it.

That's great perspective. Thank you for that Michael. As my follow up and this is related to what you just mentioned there Bernie which is pricing. I know you're obviously growing by adding more value in higher ASD products. But you mentioned that 5% price increases I think it's well documented that your competitors have raised prices by more than that. Because you didn't engage in aggressive price increases at some of your customers. I mean your competitors, sorry.

Gaining share

is

difficult to count because gaining share if it's an equal product is gaining shares in a similar product so our price betters, our performance better and we're gaining shares. Now we're talking about completely different things and those market segment we want to get in there is less price sensitive but quality, performance a lot more important. Now we offer something that is a lot more than that. Ten years ago we said who do we compete with? A lot of companies sell controller and power MOSFET, they're separate. NPS is integrated and now you're talking about NPS our product even on the silicon side and we have microcontroller, we have a memory, we have a digital, we have a power and very unique. Who do we display? It's difficult to set. And now we're using these type of silicon based technology we migrate out we provide total solutions. So who do we display and how we gain market share is very difficult to say.

Sounds like you're displacing more companies than before. Just one last quick one for you Bernie. So the DSOs were up this quarter because of the China lockdowns shipments being later in the quarter your DSOs actually went down this quarter so can you just talk a little bit about how the China lockdown impacted you I mean obviously it didn't impact you the same way but any other call you can share with us that would be great.

No, we really didn't have much impact from the China shutdown. We had a growth that is well above the industry average and the concern we might have had is if our customer supply chains got impacted but we continued to hit our delivery schedules and if there was an impact I'm sure we felt some of it but it was very marginal.

Great, thank you and congrats on the strong results.

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

Thanks guys for asking the question. First question is really kind of a high level one over the years you guys have generally outperformed the analog market by maybe 10 or 15 percentage points of growth and gain share etc etc even last year wasn't terribly outside of that range but this year it seems like that delta probably doubles at least maybe something more and I do get investors that are concerned that your increased availability versus the peers allows you to ship and then it can be double shipping in response to the double ordering and so it's a cyclical phenomenon that's widening that gap. Can you just talk about the reasons you think that gap is sustainable and then looking forward do you think that gap will continue to grow despite the fact that you're operating off of a larger base?

Yeah I mean other companies couldn't ship we have the inventory and we have the capacity to ship but this year particularly we see things are very different and a lot of products especially we ship to these tier one companies from the industrial side, from automotive side even the data centers and they don't they didn't intended to have NPS has a bigger has a majority as a bigger supply where they give us as a backup and to test it out and in the last years we ship all these units we're far better than everybody else and that's one thing the quality is everything and they took a chance when they have a shortage and so we proved that we give us a bigger opportunity these products are as as good as whatever the they designed them out and in the last year this year all the new product all the new segment start to grow and as our product we can change it we can reconfigure and that will continue continue to grow we cannot handle all the all the projects and so in the foreseeable future and these products will continue to grow and

keep in mind we're still facing large delinquencies ourselves and so we've had to be very cautious and opportunistic as far as how we allocate our wafer starts and how we meet real customer demand so I think we've been clear that during the first half of the year we did a clean up of double orders and have confirmed as I said earlier that the MPS backlog still remains very healthy and then when you look at the inventory in the channel we're at lows it's very lean and we believe we don't have perfect insight that the inventory on our customer shelves is very lean because we've only been doing partial shipments there so as far as the markets we feel reasonably confident obviously notebook or some of the consumer could give us we're trying to stay very close to that and evaluate its impact but as Michael said a lot of our new growth opportunities are in these large tier one opportunities and that's the difference from just building up in the channel or on customer shelves

come back to your questions you said you're growing on a large basis it's difficult to grow that's kind of building in my mind I don't have a limit and the limit is within yourself and people told me $500 million is your barrier $500 million is your barrier $200 million at the time was a barrier it happened $500 million then people tell me you're going to grow a billion you're going to slow down at the time seriously I was 2017 2017, 2018, 2017 when we get to a billion dollar we're going to accelerate and that's at the time that's how I see it and now NPS we're not selling silicon anymore we're selling more than a silicon why not accelerating the growth so it's of course I'm not saying now a lot of things still depend on our execution the mindset when not to dwell on selling semiconductors and selling semiconductor is limited but you have a lot of service engineering manpower our customer can benefit that's unlimited almost

and supporting Michael's point there you might remember six or seven quarters ago we made the statement that by the end of Q2 of 22 that we would have capacity to support $2 billion revenue run rate and I think that the key there is the execution and the focus and that's exactly what we've done

great thanks for all that color guys hopefully quicker follow up to all of this as you expand beyond the semiconductor side you get into I don't want to say systems but more solutions in general some of the stuff you talked about with the entire rack the AC to DC, the cooling what do we look at the gross margin doing in that that sounds like higher gross margin business and I know consistency of gross margin expansion is the mantra that you guys have lived by and delivered on but it seems like mix would go in a big tail or would be a big tail one for you going forward from a gross margin perspective so just talk about what this changing in your revenue mix means whether it's end market or system solutions versus chips to your gross margin

that's kind of things we're going to of course I can say we can charge as much as our customers are available that's kind of a half BS but the reality is I think we're comfortably stay around this mid to high to high 50s and 55 to 60% in the range I think that's a sweet spot we're not going to paint the corners for us to go over 70% when we get there we get that so far we don't have head wings I think the opportunity drives the model itself in the next couple of years I think we're going to stay around this as we are now maybe move up a little at least we don't have head wings after 3 or 4 years we'll see how we change the models

I think that we reported gross margin of .0% and as Michael said somewhere in that area is the sweet spot for our model that allows us to accelerate growth so it's something that we'll continue to evaluate but I think right now we're very comfortable with this being our model

we're

not chasing the volumes we're not actually NPS is not good at chasing we're not doing the diesel manufacturing actually NPS doesn't manufacture anything and the high volume thing is that's not NPS for today Thank you

Our next question is from Melissa Fairbanks Melissa your line is now open

Hi guys, thanks very much I will echo the congratulations on another great quarter I just had two really quick ones for you first, could you remind us what your inventory target or ideal levels of inventory would be in order to maybe clear some of the delinquencies and then second, on a somewhat related note what should we be thinking about for either as percentage of revenue or absolute investment and then what's the longer term requirements you need in order to meet your demand or your growth plans

Good questions so as far as inventory keep in mind that being so much of our conditioning is around growth that as sort of a risk management decision we believe that 180 to 200 days of inventory is what's needed so that we can manage an upside in customer demand but also if we end up in an unfortunate situation where we have lots of inventory that aren't sellable that we can compensate without having any disruption in the customer's production lines so I think that it's been difficult to manage delinquencies while increasing inventories in order to support our model but I think we've done a pretty good job in these really unusual times and then as far as the capital requirements I think we've talked in the past as far as what our spending rate is it tends to be on a quarterly basis it can be somewhere between 14 and 18 million per quarter with a lot of that being testing equipment or even if we are purchasing buildings we purchase our own office space and the first half of this year was a little bit lighter so 14 to 18 absent a big building purchase is probably a good run rate

Okay great, thanks very much, that's all for me

Our next question is from Alex Secchi of William Blair Alex, your line is now open If there are any follow up questions please click the raise hand button

Sorry, it was muted, apologies I'll start over, Bernie can you hear me? Michael can you hear me? Yes, hi Alex Apologies about that user error here I was saying apologies again if someone has already asked this question I wanted to expand a little bit on Ross's question just in terms of the competitive dynamic and your products being superior to those of the competition as well as more of the solution scale, how do we think about power management in particular and your positioning within the customer as these products become more complicated, you take up more space on the board, I would assume that those conversations are becoming more tightly coupled and that you guys are becoming more important to the customer in terms of conversation

Yes, we as a matter of fact, the Pharma NPS is from the beginning, so we don't sell pain to pain comparables and similar product, and we offer actually we are always a far better product much compact, much higher efficiencies and also cost-effective without the arm that charge on the legs that is known for NPS and at one time early period times NPS is like a price carrier kind of companies and we actually that means we left a lot of dollars on the tables and of course we are not competing in that market segment anymore Now, we offer total solutions and if you do, if you mention if you are talking about any applications they need the powers and they are talking about electrical car NPS can build the whole car and use electronics and you want to build the data centers NPS provides the entire product for data centers and we are mostly there and that is how we sell values and we are not competing on this product competing with that product, we have all software behind it and we have user interface software that changes the games we are not competing with the product per se anymore

I think an interesting dynamic that we have been observing is that power management was always an afterthought it was the last thing after you designed your board and you came up with the least bad solution now we are introduced at the very front end of the development of an application and the reason is because our power solutions enable our customers to be able to develop higher power solutions than they would otherwise so that is an interesting twist in the relationship where we are being introduced more earlier to the process and able to jointly come up with the development of shared solutions

as you see as you remember NPS like four years ago we actually built a car built a very advanced car and far advanced than any car that you see in the market and with the battery management and same time all the motor controls a lot more complex than the existing EV and so just for the purpose we can demonstrate we can do it and now we can do four years later actually we can do a lot more now so that is kind of examples of the

game that is extremely helpful and then Bernie just one last quick question in terms of the dilance any end market that we should think of or how should we think about the end markets in terms of strength versus strongest versus weakest or any notable things to call out

yeah I think that the themes that you're going to be seeing for the next two to three years are the enterprise data and automotive automotive had a relatively slow first half but that was exactly what we had in expectations there was no surprise there and we believe that the second half looks very healthy as does the data center

yeah as we see it and okay as a we don't want to okay what will we provide not customer ask for it yes we will do that we'll ask customer do that we should lead the customer so what you should need that's the game we are really playing okay we're playing ahead of the gate and I think is that all the power stuff like a 48 volts we said this is like we said in 2017 okay this is the futures and we anticipated that electrical cars we anticipated that and so now we can in the next few years and we'll see the very similar things that we'll see all of these will happen

perfect thank you so much congratulations again

thank you Alex

okay 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 thanks Jen I'd like to thank you all for joining us on the webinar and look forward to talking to you again during the third quarter which will likely be at the end of October thank you have a nice day