Monolithic Power Systems, Inc.

Welcome everyone to the MPS first quarter 2023 earnings webinar. 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 conference call, 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 Q1 earnings release and in our SEC filings, including our form 10-K filed on February 24th, 2023. which is accessible through 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 Q1 2023 earnings release, which we have furnished to the SEC and is currently available on our website. I'd also like to remind you that today's conference call is being webcast live over the internet and will be available for replay on our website for one year, along with the earnings release filed with the SEC earlier today. Now, I'd like to turn the call over to Bernie Blagen.

Thanks, Jen. NPS's first quarter revenue of $451.1 million came in about as expected, 19.4% higher than the first quarter of 2022, but 1.9% lower than revenue reported in the fourth quarter of 2022. Our results for the quarter were mixed with weaker quarter to quarter demand in our enterprise data and industrial markets, overshadowing improvements in consumer and automotive. Let's take a quick look at our first quarter 2023 revenue by market. First quarter 2023 consumer revenue of $63.4 million increased 19.5% from the fourth quarter of 2022. First quarter 2023 revenue was down 20.8% year over year. Consumer revenue represented 14.0% of our first quarter 2023 revenue compared with 21.2, a 21.2% contribution in the first quarter of 2022. First quarter 2023 automotive revenue of $105.3 million increased $8.0 million or 8.2% from the fourth quarter of 2022. This sequential revenue increase was primarily due to continued acceptance of our highly integrated solutions for advanced driver assistance systems, the digital cockpit, and lighting applications. First quarter 2023 revenue was up 93.1% year over year. Automotive revenue represented 23.3% of MPS's first quarter 2023 revenue compared with 14.4% in the first quarter of 2022. First quarter, 2023 communications revenue of $67.9 million rose $3.6 million or 5.6% from the fourth quarter of 2022. This quarter over quarter increase primarily reflected a modest revenue improvement in 5G infrastructure. First quarter 2023 revenue was up 22.2% year over year. Communications revenue represented 15.1% of MPS's first quarter 2023 revenue compared with 14.7% in the first quarter of 2022. In our storage and computing market, first quarter 2023 revenue of $119.8 million was essentially flat with revenue recorded in the fourth quarter of 2022 as declining storage revenue was offset by higher notebook sales. First quarter 2023 revenue was up 24.1% year over year. Storage and computing revenue represented 26.6% of MPS's first quarter 2023 revenue compared with 25.6% in the first quarter of 2022. First quarter 2023 industrial revenue of $47.5 million decreased $8.6 million or 15.3%. from the fourth quarter of 2022. This quarter over quarter decrease was due to lower security and power source revenue. First quarter 2023 industrial revenue was down 2.2% year over year. Industrial revenue represented 10.5% of our first quarter 2023 revenue compared with 12.9% in the first quarter of 2022. In enterprise data, first quarter 2023 revenue of $47.2 million decreased $21.3 million or 31.1% from the fourth quarter of 2022 due to broad-based weakness in data center spending. First quarter 2023 revenue was up 10.9% year over year. Enterprise data revenue represented 10.5% of MPS's first quarter 2023 revenue compared with 11.2% in the first quarter of 2022. I'd like to share some general business observations. During our two most recent earnings calls, we highlighted that customers were becoming more concerned with near-term business conditions and that ordering patterns might oscillate. This behavior continued through the first quarter of 2023. However, we do see order acceleration for products related to artificial intelligence, autonomous driving, and power modules. And our customer engagement in design wind momentum remains strong across all of our markets. Regarding operating expenses, we continue to invest in our operations to support long-term growth. In response to customer concerns, we are expanding and geographically diversifying both our global production operations and our R&D activities. In summary, We have strong customer engagement, design wind momentum, and are continuing to invest for the long term, even though timing of the revenue ramp from our customers remains uncertain. Moving now to a few comments on gross margin. Gap gross margin was 57.4%, 80 basis points lower than the fourth quarter of 2022, and 60 basis points lower than the first quarter of 2022. Our GAAP operating income was $124.3 million compared with $136.9 million reported in the fourth quarter of 2022. For the first quarter of 2023, non-GAAP gross margin was 57.7%, 80 basis points lower than the fourth quarter of 2022 and 60 basis points lower than the first quarter of 2022. This downward pressure on gross margin is expected to continue near term as we work through higher value inventory built up during the supply-demand imbalance following the pandemic. Our non-GAAP operating income was $164.1 million compared to $174.1 million reported in the fourth quarter of 2022. Let's review our operating expenses. Our GAAP operating expenses were $134.5 million in the first quarter of 2023, compared with $130.9 million in the fourth quarter of 2022. Our non-GAAP first quarter 2023 operating expenses were $96.0 million up from $94.8 million reported in the fourth quarter of 2022. The differences between GAAP and non-GAAP operating expenses for the quarters discussed here are primarily stock compensation expense and income or loss from an unfunded deferred compensation plan. For the first quarter of 2023, total stock compensation expense, including approximately $1.1 million charged to cost of goods sold, was $37.0 million compared to $35.3 million recorded in the fourth quarter of 2022. Switching to the bottom line. First quarter 2023 gap net income was $109.8 million or $2.26 per fully diluted share compared with $119.1 million or $2.45 per fully diluted share in the fourth quarter of 2022. First quarter 2023 non-GAAP net income was $146 million or $3 per fully diluted share compared with $154 million or $3.17 per fully diluted share in the fourth quarter of 2022. Fully diluted shares outstanding at the end of Q1 2023 were 48.7 million. Now let's look at the balance sheet. PB, Harmon Zuckerman, Cash cash equivalents and investments were $919.1 million at the end of the first quarter of 2023 compared to $739.6 million at the end of the fourth quarter of 2022 For the quarter, MPS generated operating cash flow of about $218.8 million, compared with operating cash flow of $52.2 million in the fourth quarter of 2022. First quarter 2023 capital spending totaled $8.9 million. Accounts receivable ended the first quarter of 2023 at $184.3 million, or 37 days of sales outstanding, up one day from 36 days at the end of the fourth quarter of 2022. Our internal inventories at the end of the first quarter of 2023 were $430.8 million, down from $447.3 million at the end of the fourth quarter of 2022, Days of inventory decreased to 204 days at the end of Q1 2023 compared with 212 days at the end of fourth quarter of 2022. Comparing current inventory levels with the following quarters projected revenue, you can see days of inventory decreased to 203 days at the end of the first quarter of 2023 from 212 days at the end of the fourth quarter of 2022. I would now like to turn to our outlook for the second quarter of 2023. We are forecasting Q2 revenue in the range of $430 to $450 million. We also expect the following. Gap gross margin in the range of 55.9 to 56.5%. Non-gap gross margin in the range of 56.2 to 56.8%. GAAP R&D and SG&A expenses between $132.5 million and $136.5 million. GAAP R&D and SG&A expenses to be in the range of $94.9 million to $96.9 million. This estimate excludes stock compensation expense, but includes litigation expense. Total stock-based compensation expense of $38.8 million to $40.8 million, including approximately $1.2 million that would be charged to cost of goods sold. Interest and other income is expected to range from $3.8 to $4.2 million before foreign exchange gains or losses. Fully diluted shares to be in the range of 48.6 to 49.0 million shares. In conclusion, while we remain cautious about near-term business conditions, NPS will continue to focus on business development and investing in infrastructure as necessary to support our long-term growth. We'll 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 Tory Svanberg of Stifel. Tory, your line is now open.