Ladies and gentlemen, thank you for standing by, and welcome to Monolithic Power Systems' fourth quarter 2019 earnings conference call. At this time, all participants' lines are in a listen-only mode. After the speaker's presentation, there will be a question -and -answer session. To ask a question during this session, you will need to press star one on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star zero. I would now like to hand the conference over to your speaker today, Monolithic's CFO, Bernie Blegen. Please go ahead, sir.
Thank you very much. Good afternoon, and welcome to the fourth quarter 2019 Monolithic Power Systems conference call. I'm joined today by Michael Hsing, Monolithic's CEO and Founder. 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 Q4 earnings release and in our SEC filings, including our Form 10-K filed on March 1st, 2019, and Form 10-Q filed on November 1st, 2019, both of 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. The 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 Q4 2018, Q3 2019, and Q4 2019 earnings releases, as well as to the reconciling tables that are posted 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. For the full year of 2019, MPS achieved record revenue of $627.9 million, growing 7.8% from the prior year, while our industry segment experienced a significant downturn. As always, we executed our strategies consistently. In recent years, especially in 2019, more and more first-tier companies recognized MPS' superior technologies as well as our product quality and our excellent customer support. We see a lot more high-quality growth opportunities ahead of us. Our objective is to successfully manage our expenses to support our growth, which will, in turn, benefit our shareholders in both the long and short term. Here are a few highlights which we achieved in 2019.
Introduced leading-edge system solutions using QSMod technologies for GPU-based artificial intelligence and machine learning applications. Introduced 48-volt QSMod technology for both cloud-based and automotive applications. Coupled with our design wins in QSMod and AI applications, MPS is at the early stage of this important revenue ramp. Won a major contract to support a Tier one automotive supplier, which will begin generating revenue in the next two to three years. Successfully co-developed cutting-edge solutions for smart driving systems and lighting applications. Began volume shipments of high-current programmable power modules for communication applications such as 5G networks. Entered the high-performance analog market with the formation of a high-precision data acquisition business group. With input from our customers, we have completed the detailed product specifications. We expect to release these products in 2020. The initial revenue ramp is expected to begin in 2021.
The rollout of these advanced products will mark MPS' introduction into the highly profitable, high-speed precision data acquisition market segment. We understand the road to success may not be smooth. However, we believe our commitment will pay off in the long term, and our shareholders will be pleased with the results of these efforts in the coming years. Let's go through lowlights. Well, we really don't have any, except there is one item worth pointing out. We deliberately reduced our inventory in Q3 and Q4 2019, which in hindsight was not necessary. As a result, our current inventory level is too low for MPS to maximize our growth in the next few months. Although we can still keep up our growth rate as in the past, we unfortunately may not be able to take full advantage of all the potential upside.
In order to fulfill customers' demands in the second half of 2020, we now have to commit tremendous effort in order to accelerate our schedule to bring up a second 12-in fab. This has created an unnecessary hardship for our team. Turning back to our full year 2019 revenue by market segment compared with 2018, communications revenue up 20.1%, computing and storage up 18.9%, automotive up 12.8%, and industrial up 12.3%. Consumer revenue was down 10.8%. Full year 2019 computing and storage revenue grew $30.1 million over the prior year to $189.2 million. This 18.9% increase primarily resulted from strong sales growth for cloud computing and high-end notebooks. Computing and storage revenue represented 30.1% of MPS's total revenue in 2019, compared with 27.3% in 2018. Communications revenue grew $14.2 million to $84.8 million. This improvement was primarily due to initial ramping of 5G infrastructure sales.
Communications revenue represented 13.5% of our 2019 revenue, compared with 12.1% in 2018. Automotive revenue grew $10.2 million to $90.3 million in 2019. This growth primarily represented increased sales of infotainment, safety, and connectivity application products. Automotive revenue represented 14.4% of MPS's full year 2019 revenue, compared with 13.8% in 2018. Industrial revenue grew $10.9 million to $99.4 million in 2019. This growth reflected sales for applications in power sources, security, and industrial meters. Industrial revenue represented 15.8% of MPS's full year 2019 revenue, compared with 15.2% in 2018. Consumer revenue fell $19.9 million to $164.2 million. With the exception of home appliances and wearables, all major consumer markets decreased between years. Consumer revenue represented 26.2% of MPS's full year 2019 revenue, compared with 31.6% in 2018.
Switching to Q4, MPS had a record fourth quarter with revenue of $166.7 million, 1.2% lower than revenue generated in the third quarter of 2019, but 8.6% higher than the comparable quarter of 2018. By market segment, revenue for computing and storage grew 27.8% year-over-year. Automotive grew 8.6%, and communications grew 8.5%. Industrial was essentially even with Q4 2018, while consumer revenue fell 5.7% from the prior year. Fourth quarter 2019 GAAP gross margin was 55.1%, 10 basis points lower than third quarter of 2019, but even with margin reported in the fourth quarter of 2018. Our GAAP operating income was $30.7 million, compared to $30.0 million reported in the third quarter of 2019, and $33.1 million reported in the fourth quarter of 2018.
Fourth quarter 2019 non-GAAP gross margin was 55.5%, 10 basis points lower than both the third quarter of 2019 and the fourth quarter of 2018. Our non-GAAP operating income was $50.8 million, compared to $51.4 million reported in the prior quarter, and $46.6 million reported in the fourth quarter of 2018. Let's review our operating expenses. Our GAAP operating expenses were $61.2 million in the fourth quarter, compared with $63.1 million in the third quarter of 2019, and $51.5 million in the fourth quarter of 2018. Our non-GAAP fourth quarter 2019 operating expenses were $41.8 million, down from the $42.5 million we spent in the third quarter of 2019, but up from the $38.7 million reported in the fourth quarter of 2018.
On both a GAAP and a non-GAAP basis, fourth quarter 2019 litigation expenses were $991,000, compared with a $692,000 expense in Q3 2019, and a $409,000 expense in Q4 2018. The differences between GAAP and non-GAAP operating expenses for the quarters discussed here are stock compensation and income or loss from an unfunded deferred comp plan. Fourth quarter 2019 stock compensation expense, including $574,000 charged to cost of goods sold, was $18.7 million, compared with $21.3 million recorded in the third quarter of 2019. Switching to the bottom line, fourth quarter 2019 GAAP net income was $32.4 million, or $0.70 per fully diluted share, compared with $0.64 per share in the third quarter of 2019 and $0.61 per share in the fourth quarter of 2018.
Q4 2019 non-GAAP net income was $48.4 million, or $1.04 per fully diluted share, compared with $1.08 per share in the third quarter of 2019 and $0.99 per share in the fourth quarter of 2018. Fully diluted shares outstanding at the end of Q4 2019 were $46.5 million. Let's look at the balance sheet. As of December 31st, 2019, cash equivalents, and investments totaled $458.5 million, compared to $422.0 million at the end of the third quarter of 2019. For the quarter, MPS generated operating cash flow of about $61.0 million, compared with Q3 2019 operating cash flow of $72.4 million. Fourth quarter 2019 capital spending totaled $8.7 million.
Accounts receivable ended the fourth quarter of 2019 at $52.7 million, or 29 days of sales outstanding, compared with the $58.3 million or 31 days reported at the end of the third quarter of 2019 and the $55.2 million or 33 days reported in the fourth quarter of 2018. Our internal inventories at the end of the fourth quarter of 2019 were $127.5 million, down from the $135.6 million at the end of the third quarter of 2019. Days of inventory fell to 155 days at the end of Q4 2019 from the 163 days at the end of the third quarter of 2019. Before turning to our outlook for Q1 2020, I would like to remind everybody of our long-term non-GAAP financial model, which has been largely unchanged for the past five years.
First, we target to grow revenue at a rate that is 10-15 percentage points greater than our peers. In a year where the market is expected to grow between five to eight percentage points, we believe that MPS should be able to grow annual revenue from 15%-20%. Second, we target quarterly gross margin to grow by 10-20 basis points sequentially. Third, to ensure continued growth, we target increases in our R&D and SG&A investment at 50%-60% of the annual revenue growth rate. Finally, we expect to return 30%-40% of the company's annual free cash flow to shareholders. This long-term financial model is an important tool in setting expectations for accelerated revenue growth and providing operating leverage while allowing for a proper level of business reinvestment. I would now like to turn to our Q1 2020 outlook.
We are forecasting Q1 2020 revenue in the range of $161 million- $167 million. We also expect the following. GAAP gross margin in the range of 55.1% - 55.7%. Non-GAAP gross margin in the range of 55.4% - 56.0%. Total stock-based compensation expense of $18 million to $20 million, including approximately $600,000 that would be charged to cost of goods sold. GAAP R&D and SG&A expenses between $58.4 million and $62.4 million. Non-GAAP R&D and SG&A expenses to be in the range of $41.0 million - $43.0 million. This estimate excludes stock compensation and litigation expenses. Litigation expenses to be in the range of $1.5 million - $2.5 million as MPS prepares for an upcoming trial, which is set to begin at the end of March. Interest income is expected to range from $1.5 million to $1.7 million before foreign exchange gains or losses.
Fully diluted shares to be in the range of $46.2 million-$47.2 million shares. Finally, we are pleased to announce a 25% increase in our quarterly dividend to $0.50 per share from $0.40 per share for shareholders of record as of March 31, 2020. In conclusion, we will continue executing on our strategy and winning market share. I will now open the phone lines for questions.
Thank you. As a reminder, if you would like to ask a question, press pound key on your telephone. To withdraw your question, press the pound key. Our first question comes from Jeremy Kwan with Stifel Nicolaus. Your line is open.
Yes. Good afternoon. Congrats on the strong results and outlook, especially in a challenging environment. I guess my first question regarding you mentioned about not having sufficient inventory on hand to meet all the immediate demand you're seeing. Is there a way you can kind of quantify what's kind of being left on the table, and is there a chance to capture this maybe later on in the coming quarters?
All these products which is designed and aimed. Our customers have upside. Many of them, they told us. We believe that, okay, these sockets are difficult to change, and they're not changing. It can't change month by month. Those volumes still will be with us.
We're not trying to identify a risk factor, with regard to our ability to execute against expectations. We're just saying that it would be imprudent for us to allow our investors to believe that there's even more upside beyond that, because we may have some constraints with regard to inventory.
Yeah. Our inventory, we involve a few thousand products, and very difficult to predict which ones will ramp first. That causes a lot of problem for our planning and also for our shipment. We're now doing partial shipment.
Great. Thank you very much. That's a helpful clarity. I guess my follow-up would be, Bernie, you mentioned entering the high-performance analog market with the high-precision data acquisition group. Can you give us more details about this? Maybe, you or Michael, maybe what initial applications you're going to go after first and how you plan to compete in this market and maybe your sales strategy. Do you need more distribution partners, or is this something that you can leverage your e-commerce platform? Thank you.
The initial one is in these initial market segments, they are in the communications and as well as medical applications. We don't have a long-term strategy. I think through our internet, through our
E-commerce
E-commerce, and we try to push everything through e-commerce.
Okay. Great. Thank you very much.
Thank you. Our next question comes from Alessandra Vecchi with William Blair. Your line is open.
Great, thanks. Congratulations on a wonderful quarter. Just on 48-volt, you talked about the new product introductions in 2019, and I believe you guys said on the last earnings call that you'd be seeing some revenue in Q1. Can you just update us on that and how we should think about the total revenue opportunity there as we look into 2020 and 2021?
Yeah, I don't think that we guided per se on giving an exact revenue outlook for Q1 with beginning of 48-volt. We said that it would be in 2020. Right now, everything is tracking pretty much along our expectations. What's really exciting is that, I think that it validates our strategy to have gone into 48-volt and to enjoy and participate in many of the opportunities that it brings us.
Okay, that's helpful. I apologize as if I missed it, but Bernie, did you give us a little bit of clarity in terms of by segment in Q1, what segments maybe you thought would be the strongest sequentially?
Yeah. I think the broader question there is what are the revenue drivers looking like? At this point, I think it's a continuation of more of what we've been seeing recently. For example, the compute and storage market is very well positioned for growth, in the early part of the year. Likewise, communication, we believe that there's also a significant opportunity for growth, particularly in Q1. I should make one asterisk on computing. Notebooks, which we report in computing, are seasonal. Coming out of Q4, they tend to have a seasonal decline, which we are anticipating as well. When you look at storage or cloud computing, I think that we're very well positioned. After that, if you look at consumer, again, that still has not hit a steady state or shown any signs of being healthy.
Again, consumer is also very seasonal, and it's normal to expect a decline from Q4 to Q1. When you look at industrial, a lot of that was revenue performance, particularly in the second half of the year, reflected inventory builds on the part of certain of our customers, who are anticipating trade restrictions. That area may fall off in Q1. Automotive, that tends to go either on a plateau or when it gets designed into a new revenue opportunity, there's a spike.
Okay. Just on automotive, some other semiconductor companies have alluded to sort of a bottoming out improvement there. Are you seeing a similar situation? I know it depends on what model you're designed into and whatnot, but do you feel like the worst is behind you?
I think we are too small to call the industry. We're growing to all these greenfield markets and the least things we say that this is the end of the world, or this is the beginning of the world. It's the beginning and the world for MPS.
Understood. That's it for me. Thank you so much.
Thanks, Alex.
Thank you. Our next question comes from Michelle Waller with Needham. Your line is open.
Hi, guys. Thanks for taking the question, and congrats on the results. I guess the first one for me is, in terms of the next generation gaming consoles launching in 2020, could you guys walk us through what the ramp is expected to look like for MPS? Is it only a back half driver, or do you think you'll see some meaningful uptick in 2Q? From a gross margin perspective, how should we think about the impact to corporate gross margins during that ramp?
Are you talking about gaming particularly?
Yeah. Specifically, yeah.
Gaming is not a major part of our business, and that is all linked into the one product is in a consumer segment, and it is in a shared similar CPU core power. The business is very lumpy, but we treat this very opportunistically, and our customers really likes our solutions, and we will support them when the demands come.
We would probably expect to see a similar ramp as we did in 2017.
Okay. That's helpful. For my follow-up, you guys mentioned previously that your dollar content opportunity with the Whitley server platform increased to $70 from $50 in the Purley platform. I'm just trying to figure out, I know this is a bit further off, but with the Eagle Stream platform that's expected to launch in 2021, how do you guys see your dollar content opportunity changing generation over generation? Just any color you can give there would be helpful.
On the dollar content, we haven't seen an opportunity to expand beyond what we currently are getting on the V14. Again, the specs are not entirely finalized, so if it turns out that the space or the power requirements are materially different from what the V14 is, there might be an opportunity for pricing leverage.
Okay. Yeah. Thank you. That's all for me. Thanks, guys.
Thank you.
Thank you. Our next question comes from Matt Ramsay with Cowen. Your line is open.
Hey, guys, this is Josh Buchalter on behalf of Matt. Thanks for taking my questions and congrats on the results in a tough environment. I guess the first question was, if we think about your inventory commentary from last quarter, are there any couple items in particular that you could point to that drove the change in your thought process from 3Q to 4Q? Is there any margin impact from bringing on the new 12-in fab, and your sort of what sounds like capacity constraints?
Well, in talking about margins and a newer 12-in fabs, okay, every time we bring up a fab, we won't have a very immediate impact for the margin improvement. All these product from the new fab is always a year or two years down the road. In terms of which segments of our inventory is tightened, again, it's actually across the board.
Got it. Thank you. I guess in the beginning of the call, you mentioned several Tier one companies launching with your design wins. Were there any, I guess, if you could rank order one or two that you're most excited about heading into 2020? Thank you, and congrats again.
Bernie said it at the beginning of the call. Okay, there's a few things that we achieved in 2019, and all of these will generate a significant revenue in 2020.
Yeah, it's not restricted to any one end market segment. It's actually very broad-based, the level of customer engagement that we're receiving from Tier ones.
Thanks, guys.
Thank you. Our next question comes from Rick Schafer with Oppenheimer. Your line is open.
Yeah. Hi, guys. I'll echo everyone else's congratulations on another monolithic quarter, another great quarter. Good job. I just had maybe a question on
On coronavirus, since it's a topic du jour, you guys have three of your four production foundries in China. I'm just curious, Michael or Bernie, if you're seeing any signs of supply disruption or do you expect to see any signs once guys just start coming back to work next week?
All the fabs, as far as we know, they are all open. They are all operating, and they are in a really tight condition. All the assembly, same thing. So far, it really hasn't disrupted our supply.
Again, Rick, it's a very early stage to really fully appreciate or understand how any of our businesses will be impacted.
Sure. I understand. Maybe a follow-up, if I could. Just on your auto biz, I know you guys secured one of the, I think, the number one Tier one auto supplier a few months ago. I'm just curious where we stand on securing the number two Tier one auto supplier. As part of your answer, I'm curious, from after you signed number one, is it too soon to have seen any noticeable uptick in design activity? Maybe also just a comment on China in general. I'd be interested. I know that it was kind of a slow year for China auto. They basically canceled the design year, I think, last year, or the model year. I'm curious what your expectations are for China this year and what you're seeing. Thanks.
Well, okay. Overall, everybody told us that autos will not be a good year. From the MPS side, we're looking pretty good for 2020. All these number one, number two, number three autos, and we are deeply engaged, and we see all the activities that more than we can handle. Now we have to pick and choose.
Got it. Thanks, Michael.
Thank you. Our next question comes from Ross Seymore with Deutsche Bank. Your line is open.
Hi, guys. This is Melissa on behalf of Ross. Congratulations on the really solid quarter. I know you guys don't guide out more than one quarter, but I guess from a high-level perspective, now that we're coming out of this industry downturn, what are your expectations for returning to either seasonal or even above seasonal growth? Is this moderated by your inventory constraints? How are you thinking about the slope of the recovery from here?
Well, you call the industrials out of the downturn. As Bernie said earlier, we will grow above the industrial market, plus what's your upturn at about 15%-20%. We're committed on that.
Okay, great. Does the inventory constraints, is that kind of restricting that growth prospect, or do you think you can still kind of hit that target?
As we said earlier, we cannot maximize it because our customers are pulling the requirements. We have to keep them lined up, and we have to partial ship them. Our inventory is in a very low stage.
Got it. The last one from me is, your Computing and Storage segment has been driving really strong growth, and I was just curious, when you look into 2020, how are you thinking about the shape of that business? In particular, are you worried about any risk of inventory digestion of lumpy buying, or do you think that it's really strong secular growth that's driving the strength?
When you look at 2019, I think that first half of the year was an anomaly where the hyperscales were trying to digest excess capacity. I would see, with the V14 having been just recently rolled out, a return to a more normalized adoption process.
Okay, great. Thank you, guys.
Thank you. As a reminder, if you would like to ask a question, press star one on your touch-tone telephone. Our next question comes from Tore Svanberg with Stifel. Your line is open.
Yes, thank you. Congratulations again. Very nice results. First question on inventory being tight. You're at 156 days. How tight is it? I know you want to run a little bit higher than that, it doesn't seem alarmingly low either. Maybe you could just elaborate a little bit on that.
I think we're at 155 days right now, and if you were to look at sort of the industry standards, we're probably in at about the midpoint range of what people might expect. There's two things, though, that differentiate us. The first is the diversity of the number of products that we maintain, and then the second is that we build inventories ahead of when we sell them, and as a result, because we're growing at a rate that is 10-15 percentage points faster than the industry, that puts more pressure on us to have more inventory available at an earlier stage. It's as much a risk management decision with the level we carry, and I think that we've said previously that we're more comfortable with inventory levels between about 160-180 days.
Yeah, for the stagnant companies, inventory, yes, is very predictable. For the growth company, and we have a particular for MPS, we have, if not thousands, we have hundreds projects, and they are taking off, and some of those faster, other ones are slower. How do we pick on those? Very difficult to call.
Well, it's a good problem to have. Second question, I always ask you this, Michael, if you could give us an update on your e-commerce business. We've noticed that the website keeps changing. If you could update on those, that'd be great. Thanks.
The e-commerce side, okay, other than MPS website e-commerce, we're still learning from that one. Our product sell to the third parties e-commerce sites doing really well. As a result of our learning, and we're changing it, you see that. You see that on our website. So far, we can't give you the significant number yet, but feels end of 2020, I think that will move some needles.
Great. At least you're now seeing the traffic really moving in the right direction, sounds like?
Yes. The key is the traffic.
Okay.
Yeah, the key is the traffic. I can give you analogies, and a year ago, we believe there's a lot of fish in the Pacific Ocean. We drop the fish in the middle of Pacific Ocean, we didn't come anything. Now we're learning, we're fishing what kind of fish, where are they? We're a lot more targeted. We have gone through the phase, okay, we're now lot more targeted now.
Very good. Make sure you have enough bait. Last question on the eMotion business, if you could also update us there, including obviously, your system level motor products.
Yes. The model is that intended is just not selling models, and intended as provide a convenience for our customers for the initial ramp. Those businesses at the very beginning, I go through, we see quite a few orders from our internet. Typically, those customers are going very slow. Their project takes a year and a year and a half to ramp. It's not like they're selling silicon pieces. Usually, models, guys, it takes about three or four years. In terms of eMotion, I don't know. Bernie, maybe you can say this. Last year, $27 million. This year, we're going to keep up a similar growth rate. Certainly will be $30 million or $40 million.
I think that we're comfortable in saying that it can be a $30 million or $40 million business here in the next few years. I think, though, that Michael makes a very good point as far as the length of time between adoption and when you actually generate revenue. Many of those applications almost have characteristics similar to automotive.
Very good. Congratulations again.
Thank you.
Thank you.
Thank you, and I'm showing no further questions at this time. I'd like to turn the call back to Bernie Blegen for any closing remarks.
Thank you. I'd like to thank you all for joining us for this conference call and look forward to talking to you again during our first quarter 2020 conference call, which will likely be in April. Thank you and have a nice day.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect. Everyone, have a great day.