Monolithic Power Systems, Inc.

Welcome everyone to the MPS third 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, EVP 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 Q3 earnings release and in our latest SEC filings, including our Form 10-K and our Form 10-Q, which are accessible through our website. MPS 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 Q3 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 Blagan.

Thanks, Jen. NPS reported third quarter revenue of $474.9 million, 7.6% higher than second quarter of 2023 and 4.1% lower than third quarter of 2022. Compared with Q2 2023, sales in enterprise data and storage and computing improved sequentially, while automotive, industrial, and communications revenue was lower. Turning now to our third quarter, 2023 revenue by market. In our enterprise data market, third quarter 2023 revenue of $98.9 million increased 106.2% from the second quarter of 2023 with sequential growth in both GPU and CPU program sales. Third quarter 2023 enterprise data revenue was up 31.4% year over year. Enterprise data revenue represented 20.8% of MPS's third quarter 2023 revenue compared with 15.2% in the third quarter of 2022. Storage and computing revenue of $129.5 million increased 3.9% from the second quarter of 2023. The sequential revenue improvement primarily reflected higher sales in commercial notebooks. Third quarter 2023 storage and computing revenue was up 14.7% year over year. Storage and computing revenue represented 27.3% of MPS's third quarter 2023 revenue compared with 22.8% in the third quarter of 2022. Third quarter, consumer revenue of $62.4 million decreased 4.3% from the second quarter of 2023 as higher gaming and monitor sales were offset by declines in TV and home appliance revenue. Third quarter, 2023, consumer revenue was down 30.1% year over year. Consumer revenue represented 13.1% of MPS's third quarter 2023 revenue compared with 18.0% in third quarter of 2022. Third quarter 2023 communications revenue of $46.8 million was down 5.1% from the second quarter of 2023, primarily reflecting lower infrastructure sales. Third quarter 2023 communications revenue was down 35.3% year over year. Communication sales represented 9.9% of our total third quarter 2023 revenue compared with 14.6% in the third quarter of 2022. Third quarter automotive revenue of $95.2 million decreased 8.8% from the second quarter of 2023, primarily due to lower ADAS and digital cockpit sales. Third quarter 2023 revenue was up 9.3% year over year. Automotive revenue represented 20.0% of MPS's third quarter 2023 revenue compared with 17.5% in the third quarter of 2022. Third quarter 2023 industrial revenue of $42.1 million decreased 15.3% from the second quarter of 2023 due to lower sales in security and industrial meter applications. Third quarter 2023 revenue was down 28.2% year over year. Industrial revenue represented 8.9% of our total third quarter 2023 revenue compared with 11.9% in the third quarter of 2022. I'd like to make some general comments about our business. In our previous earnings calls, we have noted customer ordering patterns were oscillating within the overall market. This environment persisted through Q3. We continue to see some orders getting delayed or amended by pull-in requests. This lack of short-term visibility continues to make forecasting beyond the next quarter difficult. However, as we said in our last call, our business fundamentals remain unchanged. Our design wind pipeline and customer base have expanded tremendously, particularly amongst Tier 1 accounts. Additionally, we continue to innovate and have a strong design wind pipeline positioned as well for future growth. Moving now to a few comments on gross margin. Gap gross margin was 55.5%. 60 basis points lower than the second quarter of 2023 and 320 basis points lower than the third quarter of 2022. Our GAAP operating income was approximately $135.6 million compared to $112.3 million reported in the second quarter of 2023. Non-GAAP gross margin for the third quarter of 2023 was 55.7%, down 80 basis points from the gross margin reported for the second quarter of 2023. The quarter-to-quarter decrease in both GAAP and non-GAAP gross margin is attributed largely to an unfavorable product mix. Our non-GAAP operating income was $167.8 million compared to $153.1 million reported in the second quarter of 2023. Let's review our operating expenses. Our GAAP operating expenses were $128 million in the third quarter of 2023, compared with $135.4 million in the second quarter of 2023. Our non-GAAP third quarter 2023 operating expenses were approximately $96.6 million, essentially flat with what we saw in each of the first two quarters of 2023. 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 third quarter of 2023, stock compensation expense, including approximately $1 million charged cost of goods sold, was $33.6 million, compared with $38 million recorded in the second quarter of 2023. Switching to bottom line. Third quarter 2023 gap net income was $121.2 million or $2.48 per fully diluted share compared with $99.5 million or $2.04 per share in the second quarter of 2023. Third quarter 2023 non-GAAP net income was $150.3 million or $3.08 per fully diluted share compared with $137.5 million or $2.82 per fully diluted share in the second quarter of 2023. Fully diluted shares outstanding at the end of Q3 2023 were 48.8 million. Now let's look at the balance sheet. Cash equivalents and investments were $1.04 billion at the end of third quarter 2023 compared with $941.1 million at the end of the second quarter of 2023. For the quarter, NPS generated operating cash flow of approximately $175.9 million compared with Q2 2023 operating cash flow of $90.2 million. Accounts receivable ended the quarter of 2023 at $185.8 million, representing 36 days of sales outstanding, which is one day higher than 35 days reported at the end of the second quarter of 2023. Our internal inventories at the end of the third quarter of 2023 were $397.3 million, down from $427.4 million at the end of the second quarter of 2023. Days of inventory of 171 days came in at the end of the third quarter of 2023 were 30 days lower than at the end of the second quarter of 2023. Comparing current inventory levels with following quarters projected revenue, you can see days of inventory decreased to 180 days at the end of the third quarter of 2023 from 184 days at the end of the second quarter of 2023. I would now like to turn to our outlook for the fourth quarter of 2023. We are forecasting Q4 revenue in the range of $442 to $462 million. Gap gross margin in the range of 55.2 to 55.8%. Non-gap gross margin in the range of 55.4 to 56%. Total stock-based compensation expense in the range of $32.2 million to $34.2 million, including approximately $1 million that would be charged to cost of goods sold. Gap operating expenses between $127.1 million to $131.1 million. Non-gap operating expenses in the range of $95.9 million to $97.9 million. This estimate excludes stock compensation expense, but includes litigation expense. Interest and other income in the range from $4.1 to $4.5 million before foreign exchange gains or losses. Fully diluted shares in the range of 48.7 to 49.1 million shares. We are also pleased to announce that our Board of Directors has approved a share buyback program for up to $640 million over the next three years with the goal of offsetting future dilution. In conclusion, while we expect visibility to remain limited in the short term, which was the same as last quarter, we continue to execute our long-term strategy. 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 Quinn Bolton of Needham. Quinn, your line is now open.