Monolithic Power Systems, Inc.

Welcome everyone to the MPS second 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 Blagen, VP and CFO. In the course of today's webinar, we will make forward-looking statements and projections that involve risk and uncertainty. which could cause results to differ materially from management's current views and expectations. Please refer to the safe harbor statement contained in the earnings release published today. Risks, uncertainties, and other factors that could cause actual results to differ are identified in the safe harbor statements contained in the Q2 earnings release and in our SEC filings, including our Form 10-K, filed on February 24th, 2023, and our Form 10-Q, filed on May 5, 2023, which are 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, 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. Tables that outline the reconciliation between the non-GAAP financial measures to GAAP financial measures are included in our Q2 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 Blegan.

Thanks, Jen. MPS reported second quarter revenue of $441.1 million, 2.2% lower than the first quarter of 2023, and 4.3% lower than the second quarter of 2022. Compared with Q1 2023, sales and communications were lower, while industrial, storage and computing, consumer, and enterprise data improved sequentially. Turning now to our second quarter 2023 revenue by market. Storage and computing revenue of $124.5 million increased 3.9% from the first quarter of 2023. The sequential revenue improvement primarily reflected higher commercial notebook sales. Second quarter 2023 storage and computing revenue was up 1.8% year over year. Storage and computing revenue represented 28.2% of MPS's second quarter 2023 revenue, compared with 26.5% in the second quarter of 2022. Second quarter 2023 industrial revenue of $49.7 million increased 4.8% from the first quarter of 2023, reflecting increased sales of products for power source and industrial meter applications. Second quarter 2023 industrial revenue was down 11.0% year over year. Industrial revenue represented 11.3% of our total second quarter 2023 revenue compared with 12.1% in the second quarter of 2022. Second quarter consumer revenue of $65.2 million increased 2.9% from the first quarter of 2023. The sequential quarterly revenue improvement reflected higher gaming, TV, and mobile device sales. Second quarter 2023 consumer revenue was down 33.0% year over year. Consumer revenue represented 14.8% of MPS the second quarter 2023 revenue compared with 21.1% in the second quarter of 2022. In our enterprise data market, second quarter 2023 revenue, $48.0 million increased 1.7% from the first quarter of 2023, primarily due to initial shipments of new generation AI applications, which offset softer demand for CPU applications. Second quarter 2023 enterprise data revenue was down 26.4% year over year. Enterprise data revenue represented 10.9% of MPS the second quarter 2023 revenue compared with 14.2% in the second quarter of 2022. Second quarter automotive revenue of $104.4 million decreased 0.9% from the first quarter of 2023. Second quarter 2023 automotive revenue was up 71.1% year over year. Automotive revenue represented 23.6% of MPS's second quarter 2023 revenue compared with 13.2% in the second quarter of 2022. Second quarter 2023 communications revenue of $49.3 million was down 27.4% from the first quarter of 2023, primarily reflecting lower infrastructure sales. Second quarter 2023 communications revenue was down 16.9% year over year. Communication sales represent 11.2% of our total second quarter 2023 revenue compared with 12.9% in the second quarter of 2022. I'd like to make some general comments about our business. In our previous earning calls, we have noted customer ordering patterns could oscillate. This has turned out to be the case. We continue to see some orders getting delayed or amended by pull-in requests. This lack of short-term visibility has made forecasting beyond Q3 2023 more difficult. However, our business fundamentals remain unchanged. In the last few years, our revenue and customer base have expanded tremendously, particularly amongst Tier 1 accounts. We believe we've solidified our market share gains by delivering quality products and services. Additionally, we have a strong design wind pipeline, which positions us well for future growth. Here are a few highlights. Here are a few of our recent highlights. We have been designated a preferred supplier with multiple tier one customers in automotive and telecom markets. We have started sampling silicon carbide power solutions for data centers and green energy conversion. We're also continuing development for EV power management applications. We are continue to broaden our customer base for AI applications and developing solutions for next generation platforms. We have new design wins in battery management solutions and USB-PD for automotive, industrial, and consumer applications. These will be major revenue drivers as we look ahead to 2024 and 2025. Moving now to a few comments on gross margin. Gap gross margin was 56.1%, 120 basis points lower than the first quarter of 2023 and 260 basis points lower than the second quarter of 2022. Our gap operating income was $112.3 million compared to $124.3 million reported in the first quarter of 2023. Jeff Terrell, Non gap gross margin for the second quarter of 2023 was 56.5% down 120 basis points from the gross margin reported in the first quarter 2023. Jeff Terrell, The quarter over quarter decrease in both gap and non gap gross margin is attributed largely to unfavorable variances and higher direct expenses. Our Q2 2023 non-GAAP operating income was $153.1 million compared to $164.1 million reported in the first quarter of 2023. Let's review our operating expenses. Our gap operating expenses were $135.4 million in the second quarter of 2023, compared with $134.5 million in the first quarter of 2023. Our non-gap second quarter 2023 operating expenses were $96.0 million, matching what was reported in the first quarter of 2023. The difference 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. The second quarter of 2023 total stock compensation expense, including approximately $1.1 million charged cost of goods sold was $38.0 million, compared with $37.0 million recorded in the first quarter of 2023. Switching to the bottom line. Second quarter 2023 gap net income was $99.5 million or $2.04 per fully diluted share compared with $109.8 million or $2.26 per share in the first quarter of 2023. Second quarter 2023 non-GAAP net income was $137.5 million or $2.82 per fully diluted share compared with $146.0 million or $3 per fully diluted share in the first quarter of 2023. Fully diluted shares outstanding at the end of Q2 2023 were $48.8 million. Now let's look at balance sheet. Cash equivalents and investments were $941.1 million at the end of the second quarter of 2023, compared to $919.1 million at the end of the first quarter of 2023. For the quarter, MPS generated operating cash flow of approximately $90.2 million, compared with Q1 2023 operating cash flow of $218.8 million. Accounts receivable ended the second quarter of 2023 at $169.2 million, representing 35 days of sales outstanding. which was two days lower than the 37 days reported at the end of the first quarter of 2023. Our internal inventories at the end of the second quarter of 2023 were $427.4 million, down from the $430.8 million at the end of the first quarter of 2023. Days of inventory of 201 days at the end of the second quarter of 2023 were three days lower than at the end of the first quarter of 2023. Comparing current inventory levels with the following quarter's projected revenue, you can see days of inventory decreased to 184 days at the end of the second quarter of 2023 from 203 days at the end of the first quarter of 2023. I would now like to turn to our outlook for the third quarter of 2023. We are forecasting Q3 revenue in the range of $464 to $484 million. Gap gross margin in the range of 55.5 to 56.1%. Non-gap gross margin in the range of 55.7 to 56.3%. Total stock-based compensation expense in the range of $33.5 million to $35.5 million, including approximately $1.0 million that would be charged to cost of goods sold. Gap operating expenses between $129.4 million and $133.4 million. Non-gap operating expenses in the range of $96.9 million to $98.9 million. This estimate excludes stock compensation expense, but includes litigation expense. Interest and other income in the range of $3.0 to $3.4 million before exchange gains or losses. Fully diluted shares in the range of 48.6 to 49.0 million shares. In conclusion, we continue to execute our long-term strategy. I will now open the webinar 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 Ross Seymour of Deutsche Bank. Ross, your line is now open.