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.

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 guy, but I just was curious if you were seeing any drag there from that delayed launch.

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

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, et cetera, on equipment and everything and 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 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 manufacturers, we started like two of our three years ago. And as you know, we always use a trading edge of a DRAM fab, okay, or digital fab. And three or four years ago, and clearly, okay, these higher node, like 60 nanometers and the 40 nanometers and the fabs, okay, they're all engaged with the with the NPS, okay? And as we have a reputation, so we will fill up all these fab. And now as it opens up in careers, and I mean, Taiwan's, and these are the places now, so okay, We're only talking about a fabric, this one now. And in the next few years, it would be, I can't say it's more out of China. And there's still bigger capacities. And we have a large market segment in our 30% of our revenues still from China. So in the next year or a couple of years later, next year, the problem will be a 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 requires their local supply. That's what we play in the games, and that's our customer request. And so we are 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 again.

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 okay. 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've 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, could you give us some indication of how far ahead of the unit sales do 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 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 would be really helpful. Thanks, guys.

Well, firstly, your 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 that they can be used multiple ways. And it's hard to track. And frankly, we don't really care. And as long as we, our revenue goes up. And for very high powers, And these are power, like a 48 volts of power. So, okay, we do have a pretty good dominant players in the segment. And so, I think the ramp hasn't really just started recently. So, okay, I mean, in the future, there will be a lot more. But you mentioned about notebooks. Okay, I mean, we're mostly in... in high performance gaming or mostly in a commercial notebook. And number of sets versus the CPUs is also hard to match. Because we're selling these 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. And so it's difficult to answer. So all these notebooks are all the high-end gaming notebooks and commercial devices. And 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 $3.75 per quarter, $3 for the full year. And we're evaluating the sustainability at an even higher level. We generally announce 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 in 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 Bernie ad, all the expenses, they are small. Yeah. Relatively compare the cash that we generate every year. And so what we want to do is, that's probably NPS know the best. be consistent. And we give an increase 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 you can maybe update us on the traction in that business, please.

Yeah, the module is 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 it. 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, 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 were also looking for enabling technologies that the decision process for earning a design win where 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 of months. And to 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 own lead time really hasn't changed that much. And we still... we're still in a lot of delinquencies, okay? And that's a good thing, okay? Because as Bernie said earlier, and all the benefits of our product technologies, and okay, finally, our customers realize that. And it became a high demand. And even though, and I think it's due to the new design wing activities, And they all switched to this type of a new technology or new design methodologies. And that really benefit MPS. And the same times we had to increase our capacities. I mean, not only from China, but globally, that's what our customer demand.

Yeah, and just to top off that answer is that 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 where we were able to have product availability when others didn't.

Thanks, guys. Yeah.

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 outputs for the second half. I think there's clearly some inventory purge going on in the channel. And 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 Mike Brown in the broader market?

And then I've got to follow up. We, for the, for the notebook, okay. And we, For our side, the demand is still pretty good and still good. And I think it's the orders and the orders slow down than before. But we still have a delinquency. And for memory side, for memory sites and there's a lot of a new format, okay, starting. We're still facing shortages now.

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

The rate of a booking and the rate of a cancellations, I would say they're very similar in the last few years. Yeah. I mean, last few quarters, yeah.

Okay. So no noticeable uptick in cancellations or push outs it sounds like is what you're saying. Yes. Got it. The second question is just enterprise data showing very strong growth, and 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. And just, 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, you know, sort of driving the growth? I'm just trying to sort of, what's the biggest driver, do you think, for the enterprise data segment?

I think it's both, and not only the CPU size for the servers, we gained a market share, we stepped into that game a couple years ago, but the very small percentage, and we started to ramp, but we're still far distance than the bigger suppliers. And that's from the server side. And the 48 volts, as you know, we talk about it. And we talk about it since 2017 or 18. And we said that this is the inevitable. You had to go and move up to 48 volt. And we are now in the forefront of it. And we're not replacing anybody. We set up this market trend. And also, in the data center and the rack itself, there's a big opportunity. And NPS is ramping revenue from there. from the AC powers, and these are 380 volts and 240 volts input, convert into 48 volt, and also the battery backup. And we provide the same, we provide the solutions for battery management and also cooling side. And so, NPS is almost a one-stop shopping place for data center.

Thank you, Michael. Okay.

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

Yes, thank you. First one for Michael. Michael, you're known for driving a lot of new innovative business models. And as we now start to think about, you know, adding capacity to get to 4 billion, you know, given the geopolitical dynamics and so on and so forth. I know you've talked a little bit about this, but, you know, are you thinking or working on new business models, you know, to try and secure more capacity for your continuous growth?

Well, there's one thing, right? Of course, the FAB, we had to move out, and we will have increased more capacities outside of China. We started about a couple of years ago, more than a couple of years ago. And now we engaged with some bigger DRAMs. Okay, we will fill that up in the next couple years. But going to futures, NPS actually require less semiconductors. And because a lot of products are more programmable, and we can use it for multiple use. And sometimes we're growing our revenues. Okay, we're selling a lot more than semiconductor. We're selling power solutions. more modules. And, uh, so we kind of move up the full chance. And okay. As the new requirement comes into, and okay, we, uh, we play in a market that we're not competing with, with, with anybody. And, uh, we just provide the solutions. And, uh, um, so those are, um, manufacturer. These are clearly a dip. They're different. They're building modules. And, uh, We sign up partnerships, okay, for assemble these new modules. And it's unprecedented. And a lot of testings, a lot of qualifications, NPS designed the whole system from the ground up. And so there is no such a facility out there. So we have 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. We're not just dependent on silicon-based products. It's making total solutions.

But the bigger effect hasn't really taken place yet. That would be a couple of years down the road. You will see much bigger effect. So there's a lot of the new, a lot of work to do ahead of us. And these are, particularly these are new type of a module. Nobody else has built that kind of a thing. So, okay, we're ground up, but we developed it. And we even developed it, done manufacturing and as well as 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 and higher ASP products, but you mentioned that 5% price increases. I think it's well documented that your competitors... have raised prices by more than that. So I guess my question is just simple that, are you gaining a lot of share because you didn't engage in as aggressive price increases as some of your customers? I mean, your competitors, sorry.

It's a gaining share. It's a gaining share is difficult to count because gaining share, if it's an equal product, is a gaining share. So in a similar product, And so our price betters, performance better, we're gaining shares. Now we're talking about completely different things. And those market segments we want to get in there is less price sensitive, but quality, performance, a lot more important. Now, okay, we offer something that is a lot more than that. And 10 years ago, we said, who do we compete with? And a lot of companies sell controller and a power MOSFET. They're separate. NPS is integrated. And now you're talking about NPS, our product, okay, even on the silicon side. And we have microcontroller, we have a memory, we have a digital, we have a power. and very unique. How we, what do we, who do we display? It's difficult to set. And then now it's getting to, we use these type of silicon-based technology. We migrate out. We become a provider of total solutions. So how do we, who do we display? And okay, how we gain market share? It's very difficult to set.

Yeah, sounds like you're displacing more companies now than before. Just one last quick one for you, Bernie. Most companies' 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'd be great. Thanks.

No, we really didn't have much impact from the China shutdown. Obviously, we were able to record revenue 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 continue 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. Thank you. Thank you.

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

Thanks, guys. Certainly ask 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, et cetera, et cetera. Even last year wasn't terribly outside of that range. But this year, it seems like that delta probably doubles. at least maybe maybe something more. So 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 think what you said partially is correct. Me and the other company couldn't ship. We have the inventories and we have a capacity to ship. But this year, particularly, we see things are very different. And a lot of product, especially we ship to these tier one companies from the industrial side, from automotive side, and even the data centers. And they didn't intend to have an NPS that 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, our PPA failures, okay, We're far better than everybody else. And that's the one thing, the quality is everything. But they took a chance when they have a shortage. And so we proved that. We gave us a big opportunity. We proved it. These products are as good or as better than whatever the parts they designed them out. And in the last year and this year, all the new product, all the new segment start to grow. And as our product, we can change it. We can reconfigure it. And that will continue to grow. And as we see it, I mean, we cannot handle all the projects. And so in the foreseeable future, these products will continue to grow.

And keep in mind that 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 in order to meet real customer demand. So I think we've been clear that during the first half of the year, we did a cleanup of double orders and have confirmed, as I said earlier, that the MPS's 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, but that the inventory on our customer shelves is likewise 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 it's that secular growth that's really driving it. And that's different from just building up in the channel or on customer shelves.

Yeah. I'll come back to the questions. Okay. Now you said that you're growing a large basis. So you grow, okay. It's difficult to grow. That's kind of a building that everybody's mind. Okay. In my mind, I don't have a limit. And, uh, the limit is within yourself what to do. And, uh, People told me early on, $200 million, it's your barrier. $500 million is a barrier. $200 million at the time, it was a barrier at one time. It happened. And $500 million, it wasn't. Then people tell me, okay, you're going to grow a billion dollars, you're going to slow down. At the time, seriously, I was 2017, 2018, yeah, 17. I actually said it, and okay, when we get to a billion dollar, we're going to accelerate it. And that's at the time, and that's how I see it. And now, okay, NPS, we're not selling silicon anymore. We're selling more than silicon. And why not accelerating the growth? So it's, of course, I'm not saying that now, okay, a lot of things still depend on our execution. But only thing is that the mindset changes. We're not too well on selling semiconductors. And a selling semiconductor is limited. But you have a lot of service, engineering manpower. Our customer can benefit to it. 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 a $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. I guess the hopefully quicker follow up to all of this is 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, all the above. 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 margins.

Yeah, that's kind of things that we're going to, of course, I can, I want to say, okay, we can charge as much as our customers available. So, okay, that's kind of a half BS, okay? But the reality is, okay, I think that we're comfortably stay around this mid to high 50s and 55 to 60%, okay? I think that's a sweet spot for us. We're not going to paint the corners for us to go to over 70%. When we get there, we'll get there. So far, we don't have headwinds. I think the opportunity drives the model itself. In the next couple of years, I think we're going to stay around this. And as we are now, maybe move up a slide later. At least we don't have headwinds. And so after three or four years, we'll see how we change the models.

I would just add that I think that we reported a gross margin of 59.0%. And as Michael said, you know, somewhere in that area is, you know, sort of the sweet spot for our model that allows us also to accelerate our rate of revenue 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.

Yeah. We're not chasing the volumes and going down the – we're not – actually, NPS is not good at chasing a volume. We're not doing the – these are manufacturing. Actually, NPS doesn't manufacture anything. And the high volume thing, that's not NPS for that. Thank you.

Our next question is from Melissa Fairbanks of Raymond James. 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 CapEx this year, 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 positioning 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 for that without having any disruption to our customers' 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, you know, we've talked in the past as far as what our spending rate is. It tends to be, you know, on a quarterly basis 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, you know, we purchase our own office space. And the first half of this year was a little bit lighter than our normal run rate. But I think 14 to 18 absent a big, you know, building purchase is probably a good run rate.

Okay, great. Thanks very much. That's all for me.

Thank you. Our next question is from Alex Secchi of William Blair. Alex, your line is now open.

Okay.

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. Yeah. Hi, Alex. Apologies about that user error here. I was saying apologies, again, if someone's already asked this question, but I wanted to expand a little bit on Ross's question, just in terms of the competitive dynamic and your products being, you know, sort of being superior to those of the competition, as well as more of the solution sale. How do we think about power management in particular and your positioning within the customer space? as these products become more complicated, you take up more space on the board, I would assume that those, those conversations are becoming more tightly coupled and that you guys are becoming more important to the customer in terms of conversation.

Yes. I mean, we, we, we, and as a matter of fact, in the pharma NPS is from the beginning. So we don't sell and I came and the, pink-to-pink comparables, okay, and a similar product. And, okay, we offer, actually, we are always a far better product and much compact, much higher efficiencies, and it's also cost-effective without the charger on the legs. And that is known for NPS. In the one time, it's early period of the times, NPS is like a price carrier kind of companies. And we actually, we didn't, that means that we left a lot of dollars on the tables. And of course, we're not competing in that market segment anymore. Now, okay, we offer either total solutions, and if you're talking about any applications, they need a power, and you're talking about electrical car, NPS can build the whole car, and they use electronics. And you want to build the data centers. NPS provides the entire product for data centers. And we're mostly there. And that's how we sell values. And we're not competing on this product competes with that product. We have all software behind it. And we have a user interface, software. That changes the games. We are not competing with the product per se anymore.

I think an interesting dynamic that we've 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, is because our power solutions enable our customers to be able to develop higher power solutions than they would otherwise. So that's an interesting twist in the relationship where we're 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 it. And four years later, actually, we can do a lot more now. And so that's kind of examples.

That's extremely helpful. And then, Bernie, just one last quick question. In terms of the guidance, 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 new surprise there. And we believe that the second half looks very healthy, as does the data center.

Yeah, as we see it, we don't want to, okay, what will we provide? It's not customer ask for it. Yes, we will do that. We'll ask the customer to 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 game. And I think it's a, All the power stuff, like a 48 volts, we said that this is like it was said in 2017. 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 very similar things. We'll see all of these will happen.

Perfect. Thank you so much. Congratulations again.

Thank you, Alex.

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.

Great. 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.