Welcome, everyone, to the MPS second quarter 2020 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 Hsing, CEO and Founder of MPS, and Bernie Blegen, VP and CFO. During this webinar, we will discuss our Q2 2020 financial results and guidance for Q3 2020, followed by a Q&A session. Analysts, you are currently muted. If you wish to ask a question during the Q&A session, please click on the Participants Icon on the menu bar, and then click the Raise Hand button. 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 SEC filings, including our Form 10-K filed on February 28, 2020, and our Form 10-Q filed on May 11, 2020, which are accessible through our website, www.monolithicpower.com. 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, interest and other income, 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 earnings release, which we have filed with the SEC. I would refer investors to the Q2 2019, Q1 2020, and Q2 2020 releases, as well as to the reconciling tables that are posted on our website. Now, I'd like to turn the call over to Bernie Blegen.
Thanks, Gen. MPS achieved record second quarter revenue of $186.2 million, 12.3% higher than the first quarter of 2020, and 23.3% higher than the comparable quarter in 2019. Second quarter revenue growth was broad-based, except for Automotive. Our strong year-over-year revenue growth for 2020 in spite of the COVID-19 pandemic, was a result of our diversified growth strategy and our technological innovation. Maintaining this level of superior performance and realizing future growth opportunities requires us to step up investments in capacity, infrastructure, quality assurance, and headcount. We are also expanding our operating capabilities outside of China. Turning now to our second quarter 2020 revenue by market. Second quarter Computing and Storage revenue of $64.1 million increased $12.1 million, or 23.3%, from the first quarter of 2020. Computing and Storage revenue represented 34.4% of MPS' second quarter revenue.
The sequential revenue increase reflected strength in Storage revenue along with increased notebook revenue. Second quarter Server revenue maintained the elevated levels achieved in the first quarter of 2020, and Server revenue was significantly higher than the second quarter of the prior year. Second quarter Consumer revenue of $47.7 million increased 27.4% from the first quarter of 2020 and represented 25.6% of our second quarter 2020 revenue. The sequential quarterly revenue increase reflected improved sales of products for home applications, IoT, gaming consoles, and VOT, a new acronym which stands for a variety of things. Second quarter 2020 Communications revenue of $30.1 million was up by 8.0% from the first quarter of 2020. Product sales for Communications Infrastructure, including 5G networking, increased sequentially, as did sales of legacy router and wireless applications. Communication sales represented 16.2% of our total second quarter 2020 revenue.
Second quarter industrial revenue of $26.6 million increased 5.4% from the first quarter of 2020, as increased revenue for power sources more than offset a decrease in security-based product sales. Industrial revenue represented 14.3% of our total second quarter 2020 revenue. Second quarter Automotive revenue of $17.8 million fell 23.7% from the first quarter of 2020, as a number of automotive OEMs shut down production for most of the quarter in response to the COVID-19 pandemic. The range of applications MPS encompasses now includes infotainment, smart lighting, ADAS, and autonomous driving. Again, we believe MPS is well-positioned to accelerate growth in Automotive when the market returns. Automotive revenue is 9.5% of MPS's total second quarter 2020 revenue. I should point out that despite the past four months of COVID-related travel restrictions, our design activities remain largely unimpacted by the pandemic and have exceeded our expectations across the board.
We have seen solid engagement, particularly with top-tier customers. These new and continuing customer relationships position MPS for long-term success in these critical markets. GAAP gross margin was 55.1%, 10 basis points lower than the first quarter of 2020, and flat compared with the second quarter of 2019. Our GAAP operating income was $28.0 million compared to $31.0 million reported in the first quarter of 2020, and $20.1 million reported in the second quarter of 2019. Non-GAAP gross margin for the second quarter of 2020 was 55.7%, up 20 basis points from the gross margin reported in the first quarter of 2020, and 10 basis points higher than the second quarter from a year ago. Our non-GAAP operating income was $53.0 million, compared to $45.9 million reported in the prior quarter, and $43.7 million reported in the second quarter of 2019. Let's review our operating expenses.
Our GAAP operating expenses were $74.6 million in the second quarter of 2020, compared with $60.5 million in the first quarter of 2020, and $63.1 million in the second quarter of 2019. Non-GAAP second quarter 2020 operating expenses were $50.7 million, up from the $46.1 million we spent in the first quarter of 2020, and up from the $40.3 million reported in the second quarter of 2019. The differences between non-GAAP operating expenses and GAAP operating expenses for the quarters discussed here are stock compensation expense and income or loss from an unfunded deferred compensation plan. For the second quarter of 2020, total stock compensation expense, including approximately $642,000 charged cost of goods sold, was $21.0 million, compared with the $18.6 million recorded in the first quarter of 2020.
Switching to the bottom line, second quarter 2020 GAAP net income was $30.2 million, or $0.64 per fully diluted share, compared with $35.8 million or $0.77 per share in the first quarter of 2020, and $20.7 million or $0.45 per share in the second quarter of 2019. Q2 non-GAAP net income was $50.6 million, or $1.08 per fully diluted share, compared with $44.3 million or $0.95 per share in the first quarter of 2020, and $41.9 million or $0.92 per share in the second quarter of 2019. Fully diluted shares outstanding at the end of Q2 2020 were 46.8 million. Now let's look at the balance sheet. Cash, cash equivalents, and investments were $515.4 million at the end of the second quarter of 2020, compared to $492 million at the end of the first quarter of 2020.
For the quarter, MPS generated operating cash flow of about $59.3 million, compared with Q1 2020 operating cash flow of $51.4 million. Second quarter 2020 capital spending totaled $14.6 million. Accounts receivable ended the second quarter of 2020 at $55.1 million, representing 27 days of sales outstanding, which was three days lower than the 30 days reported at the end of the first quarter of 2020, and six days lower than the 33 days in the second quarter of 2019. Our internal inventories at the end of the second quarter of 2020 were $152.1 million, up from the $131.5 million at the end of the first quarter of 2020. Days of inventory of 166 days at the end of the second quarter of 2020 were five days higher than at the end of the first quarter of 2020.
I would now like to turn to our outlook for the third quarter of 2020. As we are still in the midst of the COVID pandemic, demand visibility for the remainder of the year is not as crisp as we usually see at this point in the year. We are forecasting Q3 revenue in the range of $200 million-$210 million. We also expect the following: GAAP gross margin in the range of 55.2%-55.8%, non-GAAP gross margin in the range of 55.5%-56.1%. Total stock-based compensation expense of $21.2 million-$23.2 million, including approximately $700,000 that would be charged to cost of goods sold. GAAP R&D and SG&A expenses should be between $70.7 million and $74.7 million. Non-GAAP R&D and SG&A expenses to be in the range of $50.2 million-$52.2 million. Litigation expense should range between $1.8 million and $2.2 million.
Interest income is expected to range from $1.5 million-$1.7 million, and fully diluted shares to be in the range of 46.5 million-47.5 million shares. In conclusion, we continue to grow year-over-year. We are excited about our design activities in the pipeline and expanding our reach in the new frontiers. 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 comes from Tore Svanberg from Stifel. Tore, your line is now open.
Yes. Thank you, Michael and Bernie. Congratulations on another very strong quarter. Before I get into the sort of near-term stuff, you did mention something at the beginning there that you are exploring some operations outside of China. I'm not talking about design centers here, but are you working on something else on the manufacturing side outside of China at this point?
Yes. We try to expand at another fab, and we're exploring another 12 in fab, okay, as well as an eight-inch fab outside of China.
Okay, very good. As we look at the September quarter, congratulations on getting to $200 million in quarterly revenue. Could you maybe talk a little bit about some of the end markets that's going to drive that growth? I'm sure the storage and server business is going to continue to remain strong, maybe give us the puts and takes on each end market going into the September quarter.
Yeah. Tore, you know our product is a very fundamental. These are building blocks, okay? We supply all these power management for all electronic devices, including automotives. Now, one segment, clearly in this pandemic era, everybody knows the infrastructures for telecommunications and data centers as well as your IoTs and the PCs, they all grow. MPS just supply these building blocks for all these segments. As Bernie said earlier, other than Automotive, all segments are doing well.
Very broad-based.
Very good. Just one last question. The DSO is pretty low now, Bernie, and I assume that's just purely linearity. Anything else going on there?
No, I think we've always had a very good track record with credit and collections, and the 27 days in the quarter really is a reflection of how front-loaded the initial sales were in Q2.
Congratulations again. Thank you.
Thank you, Tore.
Thank you, Tore. Yeah.
Our next question comes from Quinn Bolton from Needham. Quinn, your line is now open.
Thank you. Let me echo my congratulations. I guess, Bernie, you made some comments about visibility being a little bit less clear today than in years past. Obviously, COVID, it's understandable with the COVID outbreak. I guess you guys have had a very strong sort of first three quarters of the year, including guidance for September. Just wondering, can you talk to us about your thoughts on the sustainability of this demand? Are there certain factors, perhaps the game console ramp, that may be leading to some particular strength in the September quarter that may soften seasonally as we look out beyond the September quarter? I've got a follow-up.
Sure. I think that just given the nature of the current macro environment, where we did benefit from accelerated ordering patterns, particularly at the end of Q1, that we don't want to become complacent because we have seen falloffs in demand after we've had a big run-up like we just experienced. It isn't that we're seeing anything specifically in the market that causes us concern, but just past experience tells us that it's something that we have to monitor.
Yeah. Bernie's comment was very similar to our statement in the Q1 and the Q2s. Okay. We expected the times that all segment will growth, including Automotive. What is the magnitude of a growth is to our surprise. Even during the first couple of quarters, we mentioned it. Okay. We have a more order than we can ship. So now we're going to second half of this year, the macro conditions to us, it's unsettled. So we will prepare change quickly. Overall, orders are still very good.
One last thing, just to follow up on Michael's comment there, is that in the beginning of the year, we did have concerns about supply chain capacity and we've lowered that risk, but that's still an issue that is requiring ongoing management.
Understood. In the longer- term, you mentioned, you're positively surprised by the strength of the design activity, particularly with Tier 1s. I'm sure you're not going to name customers, but are there a couple of applications you might be able to highlight for us that you're really excited about over the next year or two?
A couple of them clearly is the 48 V and, as we talk about it, and the other one is in the data centers business. Also as Bernie mentioned earlier, is in the automotive, we engage with heavily, and a lot of activity in the ADAS.
I think to keep in mind that in a lot of markets that Michael just listed is that we are a relatively small player, so we have a lot of upside and greenfield opportunities that should continue to drive our growth for the next two to three years at least.
Yes.
Thank you, guys.
Yeah.
Thank you.
Our next question comes from Joshua Buchalter from Cowen. Joshua, your line is now open.
Hey, guys. Thanks for taking my question and congrats on the results. I wanted to dig into Storage and Computing a bit. Given the size of the upside, I was a bit surprised to see Server not called out as a driver of sequential growth. Could you maybe provide some granularity on was this a function of 1Q was just such a high watermark or was there anything else going on, within that market that allowed it to grow less than the other ones? Thank you.
Yeah. Server growth is not surprise to us. We talk about it in the past quarters. We expected a growth from a year ago. This year, we will grow substantially from last year. There is no surprises. Our product is okay. As a reminder to everybody, okay, it's still a power supply, and we're powering up the CPUs and powering up all the electronic devices that's used in a server.
Yeah. I think we tried to add some color to that in the prepared comments by saying that we enjoyed a noteworthy step up between Q4 and Q1, and we maintained that same high-l evel in Q2. When you look at the year-over-year, Server is one of our largest year-over-year growth drivers.
Our next question comes from William Stein from SunTrust. William, your line is now open.
Great. Thanks for taking my question. Congrats on these very strong results. I'm wondering if, Bernie, you can talk to us about backlog, versus turns expectations. I think last quarter, we had this sort of special situation where you essentially guided for negative net turns. Maybe you can confirm my recollection and clarify, what guidance implies in that regard for Q3.
I think that, the term that we referred to at the end of Q1 was the toilet paper effect, that there was a outsized ordering pattern in the last four weeks of March. We had to take Q2 to more closely understand what that represented. After we went customer by customer and geography, we found out that there were a couple of drivers. Well, three. The first was, is that there was a stepped up increase in demand, and particularly, as it relates to work from home applications. That included storage, and 5G, and notebooks, and then, as I said earlier, continued strong ordering within Automotive. There was also an acceleration of demand, where the distributors and customers wanted to get in line to make sure that they were not.
What we had to do is a very close evaluation to make sure that we don't let the channel inventories rise too much because of over-enthusiasm. At this point, we enter this quarter again with a similar backlog profile as we had last quarter, meaning that there's no reliance on turns business in order to meet our expectations.
Yeah. Our assumption, the toilet paper effect, wasn't quite right. There's a very little. After we dive in deeper into our customers, our distributors, and we found that these are real growth. Somewhat, it's very sustainable.
Okay, got it. The elevated orders last quarter were not a sort of a trick. They were for real, and it sounds like you're seeing elevated backlog this quarter as well. Maybe the other side of this, of course, is supply. That's my second question. Bernie, through the quarter, you talked about how the company was more able to deliver. We certainly saw that in the quarter. I think you talked about increased supply at one foundry, like, I think a doubling of capacity that's sort of real time, and then another expectation for a ramp in Q4 at maybe a new foundry from one of your existing partners. Together, it sounded like that was 40% additional capacity, which suggests maybe up to two years of a sort of runway. Maybe you could clarify.
I think on the call earlier, you talked about two fabs that are ramping now. Maybe you can just clarify for us where we are and where you expect capacity to go over the next few quarters.
Yeah. I think that to give full credit, our operations capabilities were put to the test in the early part of this year. I think that we responded as well as one could have expected. Most of the numbers that you cited as far as the capacity expansion are pretty close to the mark. I'm not going to confirm or reject them, but you're in the ballpark. I think that it remains an issue because as we look ahead, our growth prospects for the next three to five years certainly are significant. What we're trying to do is get both capacity, but then also get it geographically distributed. That's going to require a continuing level of investment as we look ahead here for the next few years.
Thank you.
The next question is from Chris Caso from Raymond James. Chris, your line is now open.
Yes. Thank you. Good evening. Congratulations on the pioneering conference call format, which seems to be working very well. My first question is just a follow-on from the other question. With respect to capacity and the constraints that you're under right now, do you foresee a situation over the next few quarters where those capacity constraints could be an impediment to revenue? I guess from where we are right now, actually it appears that we're seeing some good upside. The toilet paper effect is not having the effect that we feared. Is there still sufficient headroom for revenue growth as we go through the next few quarters as you're putting these capacity plans in place?
Yeah. Let's put that way, our production people, they're working over 100%. We still have more revenue that we can ship. I mean, we can order more than we can ship. Okay. As we increase the capacities in the last six months, the issues are much better now.
I'd also probably just having learned from this recent experience, that we're more likely to also increase our internal inventories, so we don't have to rely upon necessarily in-the-moment production excellence.
Great. As a follow-up, with regard to the Compute segment, we've heard from some others, is that the market itself, I guess there's some areas of the compute market which look like they'll be slowing as you go in the second half. There was some of that work from home demand in notebooks, for example, that looks like it was pulled forward to the first half. Intel had talked about some of the cloud data center revenue, which may be showing some decline after a number of strong quarters. I know you have a lot of content increase as well, I guess the question is, if the market should slow, one, is that what you're seeing? Secondly, the extent of your content increases, are they greater than what's happening in the market?
We are the new players. We are relatively small player in the market segments. For our revenue growth, we don't see any slowdown. As we become a much bigger percentage, then we can answer your question better.
Got it. Thank you.
Our next question comes from David Williams from Loop Capital. David, your line is now open. We'll move to the next question. This comes from Ross Seymore from Deutsche Bank. Ross, your line is now open.
Hi, guys. This is Melissa on for Ross. Thank you for letting us ask a question, and congratulations on a really strong quarter. I was hoping to get your opinion on the Automotive end market, specifically. Your larger peers were also impacted by the factory shutdowns around the world. As you're thinking about the recovery in the second half, how do you see this business recovering? I know you don't guide more than one quarter out, but can you help us understand how sales into auto will resume?
I think that Q3, we're going to see a restabilization in the market. Interestingly, even though the manufacturing of the OEMs was shut down for two to three months, people still continued to buy cars. There is some pent-up demand that they need to meet, but I think that the ramp won't necessarily snap back. I'm expecting to see some additional improvement in Q4 as they start to roll out the new model year. I don't see it being the stairstep growth that we've experienced in past years.
Our next question will come from David Williams from Loop Capital. David, your line is now open.
Perfect. Thank you. Thanks for letting me ask the question, and congrats on the quarter. I guess the first question is really around the gaming console, and maybe if you could provide any color around the benefit in the quarter from the gaming console, and then maybe how that layers into the remainder of the year?
I think that the gaming console is a very somewhat predictable business as far as there's almost a bell-shaped curve that occurs over five months, beginning in June and ending in October. That is pretty heavily weighted towards Q3, for what we sell into. Right now, the visibility will not be crisp, is the word we used before, probably until late August or early September, though right now we seem to be tracking very well against our expectations.
Okay, you'd characterize that as maybe stable towards your expectations?
Yeah. Stable is not a word I normally assign to gaming consoles, because it does create this bubble which has certain of its own management challenges. Yes, I would say that the demand is meeting our expectations, and we have adequate supply chain to handle it.
Great. Maybe thinking about the data center and maybe some of the computing, how much of this do you think is maybe pull ahead versus more cycle related? Do you think this is sustainable? I realize you're a smaller player, do you think you're seeing any pull ahead here, or do you think all of this is maybe natural demand that would've come through pandemic or not?
No, I think the work from home phenomena is real and at some level we are able to quantify it. I do think that it is a more front-end loaded cycle, as we sort of offered an earlier response. The only thing to really add is that we're such a small player, and this is sort of our first opportunity to really experience accelerated revenue growth. Again, our visibility and predictability is a little bit low for us right now.
Great. Thanks so much.
Our next question comes from Rick Schafer from Oppenheimer. Rick, your line is now open.
Thank you, and I'll add my congratulations. Nice job, guys. I guess my first question, nobody's talked about or asked about 5G yet, so maybe I don't know if you could give a sort of update of your progress on the 5G ramp for you guys. How are things for your largest customer there? I know there's been some uncertainty. I know the government or Trump has been trying different ways to defy any arrangements with that customer. I didn't know if you could talk about how many other OEMs you're shifting to now or doing design work with. I have a follow-up.
Rick, your question is barely audible and barely interpretable. We can try. I can try to answer your questions. Okay. 5G is one of our biggest opportunities and very highly concentrated customers. As you know, with the 4G, we don't have any revenues. Very little revenues. Now, we became a significant player in there. That's because our technologies. As far as where to grow and which regions, clearly China is emphasized, Huawei is the biggest players now. All the other regions, we engage with them deeply, but I have to say they're much slower. What is the impact for our future business? I believe it's a matter of time. The longer the time give us, actually is better for MPS. All the other players familiar with MPS are familiar with MPS technologies. The time is actually on our side. May affect the revenues.
In China, we see it keep growing in a 5G network.
Our next question comes from Kamil Mielczarek from William Blair. Kamil, your line is now open.
Hey, good evening. Thanks for taking my question. First is, I just want to follow up on 5G. Can you provide some detail on how to think about the content you have, and specifically the potential SAM, given your POL products can be used in transceivers, base stations, fiber optic networks, and back-end data centers? I assume there's a potential for QSMOD as well.
Yes. You're absolutely right. Okay, our opportunity, we don't have clear pictures because, again, our product is very fundamental, and you're supplying power, and doing power management for each component. It's really a rough calculation, is more than $40, $50 per station.
That's great. Thank you. Just a quick follow-up. How should we think about your entrance into the HPA market? I believe you are initially targeting medical and communication applications. What's your differentiation versus competitors like TI? Lastly, is this a 2021 revenue event?
The primary competition is really with ADI, and this is the advanced analog. You're exactly correct that the first opportunity that we're pursuing is actually with a customer, and they've provided us their spec, and we would expect to be able to have a product that can be prototyped by the end of this year and have initial revenue after that. As far as the longer-t erm roadmap, we talked about communications because it is the next targeted market that where your High Performance Analog-
Also data converters.
Data converters.
I missed the first part of the questions. Okay.
Yeah.
Yeah. Okay. Go ahead.
Yeah. Just finishing up, where the need for high frequency and high precision, and as I said, there's only one or two other players out there. It's a very difficult market to penetrate. Here again, we believe we're very well- positioned to move into it over the course of the next three to five years.
Our next question comes from Tore Svanberg from Stifel. Tore, your line is now open.
Yes, just to follow up, Michael, I'm asking you this question because I really respect your view. If you look at Maxim, Linear, ADI, they've been competitors of yours for many years, whether for business or for engineers. They're now all going to be under one umbrella. What do you think that means for the analog space and perhaps for Monolithic Power specifically?
Oh, thanks for saying you respect me. Maxim, I think it's the same. In Maxim's and Linear Technology, they are very proven companies, and we've in the past competed with them, and MPS has a little bit agile in terms of technology development and product development. Our growth is faster. I think going into the future, MPS now has become a meaningful player. If you look at Linear Technology with their $1 point something billion, MPS is very close to it. Our customers were looking for a second or multiple suppliers. With the superior technologies, I think that will give us more opportunities.
Very good. Congrats again.
Thank you again.
Our next question comes from Kevin Garrigan from Rosenblatt. Kevin, your line is now open.
Guys, thanks for taking my question. Congrats on a great quarter. Just a quick one for me. Can you give us a little color on your e-commerce business? I know with everything kind of virtual now and your recent agreement with Farnell Electronics, can you kind of talk about what's going on there?
Yes. Okay. That's the e-commerce. Okay. Glad that you still remember that. I have to say it's very slow, okay? I really believe that. Okay. I firmly believe that. Okay. We see some initial result, and if you follow our website, and our website keep evolving. Up to a point now, we know how do we double or triple the subscribers. It's actually more than triple. Small start with the small members. We're still doing a lot of surveys, and now I think the website is good enough and we can work with our partners and online partners and distribute the message much more clearly. I will see in the next few months, and I hope to see a lot more result. Overall, we still believe it, and we much believe it, and the plug-and-play solution, it will happen.
Online distribution, online sales, online configurations, that will be the futures. For MPS opportunities, instead of sell a dollar, sub dollar parts, now we're selling $4, $5 or beyond, for each component. The opportunities still remain, and we are still learning.
Got it. Thanks, guys.
Yeah.
Our next question comes from Quinn Bolton from Needham. Quinn, your line is now open.
Hey, great. Thanks for letting me ask a follow-up question. Michael, you said some of the applications you're most excited about are centered around the data center as well as 48 V. Just a couple of follow-on questions. With NVIDIA's latest 7 nm generation of GPUs going into the data center, wondering if you're able to comment whether you're supplying any power management devices for that new A100 GPU, either in a 12 V or a 48 V SKU. Longer- term, as we look forward to the new Intel VR14 spec, do you have a sense how much of that market might be 12 V versus 48 V? Thank you.
All right. Okay. Obviously, we don't mention customers' names and customers' projects names. Let's put that way, all the 48 V products, that we have a product in it. In terms of the VR14 specs, okay, we have a reference design in there. MPS will be compared VR13s and, we're also a small part of it. I think the opportunity for MPS, and it became a significant player, is a main player in the VR14 in the next few years.
Both in the 12 V as well as 48 V.
Yeah, for the 12 V and the 48 V, my belief is mostly still 12 V. 48 V, the application is still limited.
Great. Thank you for that color.
Analysts, 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. I'd like to thank you all for joining us for this webinar, and look forward to talking to you again during our third quarter webinar, which will likely be at the end of October. Thank you, and have a great day.