Earnings Call: Q3 2019

Oct 22, 2019

Ladies and gentlemen, thank you for standing by, and welcome to Monolithic Power Systems Q3 2019 Earnings Conference Call. At this time, all participants Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Chief Executive Officer of Monolithic Power Systems, Michael St. Sir, please go ahead. Thank you. Hello, everyone. Good morning from HauAC. We held our 3rd quarter Board meeting in a newly established custom support and a marketing center for China. We had our board members call the facilities and the Overseasiba operation here. In the last few days, we received many messages that have showed overwhelming support in response to our recent publications. Are representing NCS Management to express our deep appreciation for your trust and support. Our reaction to this publication is that it is malicious and manipulative we will not know your intelligence to go through the details. Lastly, I assure you We will take a proxy action, including legal action against any malicious and unlawful activity damaging NPS reputation. Our share and our share for the details. Thank you again. Now I let me back Viets itself. Wendy? Thank you for that. Good afternoon, and welcome to the third quarter 2019 Monolithic Power Systems conference call. In the course of today's conference call, we will make forward looking statements and projections that involve risks and uncertainties, 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 release and in our SEC filings including our Form 10 K filed on March 1, 2019, and Q2 2019 Form 10 Q filed on August 2nd, 2019. Both of which are accessible for our website at www.monolithicpower.com. MTS assumes no obligation to update the information provided on today's call. We will be discussing gross margin, operating expense, R and D and SG and A expense, operating income, interest and other income, net income and earnings on Jose 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 compared to the aforementioned 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 Q3 2018, Q2 2019, Q3, 2019 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 1 year along with earnings release filed with the SEC earlier today. MPS achieved record 3rd quarter revenue of 100 $68,800,000, 11.8 percent higher than revenue in the second quarter of 2019 and 5.5% higher than the comparable quarter in 2018. Looking at our revenue by market, In our computing and storage market, 3rd quarter revenue of $52,800,000 increased $11,200,000 or 26.9% from the second quarter of 2019. Computing and storage revenue represented 31 point 3% of MTS's 3rd quarter 2019 revenue. The sequential revenue the sequential quarterly revenue growth When broad based with sales gains recorded in power management for TCU's high end notebooks, servers and storage, Coupled with our recent design wins, using QS Mods on state modulation, in server and AI applications, MTS is at the early stage of this important revenue ramp. I also would like to introduce a killer product a next generation 48 Volt Power solution for artificial intelligence, server and supercomputing applications. This solution offers 1 of the highest levels of energy efficiency with the smallest form factor of its class. Our customers have validated our solutions, which we believe will win market share in this important segment. 3rd quarter, Automotive revenue $24,400,000 grew 15.1 percent over the 2nd quarter 2019, reflecting initial sales of product support, infotainment, smart lighting, ADOS, and autonomous driving. In addition, we were awarded a relatively large contract in a major Tier 1 automobile supplier. We expect to begin generating revenue from this relationship in the next 2 to 3 years, Our mobile revenue was 14.5 percent of NPS for the total third quarter of 2019 revenue. 3rd quarter 2019 industrial revenue of $28,900,000 increased 28.6 percent from the second quarter of 2019 due primarily to increased revenue for security systems, power sources and industrial leaders. Much of this growth is projected in project based, which can vary significantly by quarter. Industrial revenue represented 17.1 percent of our total third quarter 2019 revenue. In our consumer markets, revenue of $43,900,000 was essentially flat with the second quarter of 2019 and represented 26 0.0% of our second quarter 2019 revenue. Sequentially, 3rd quarter revenue reflected a seasonal increase in certain late consumer markets, offset by decreased sales of products for wearable applications and set top boxes. 3rd quarter 2019 communications revenue was $18,800,000, was down 14.5% from the second quarter of 2019, Infrastructure, 5g Sales, along with sales from legacy router and wireless applications, decreased sequentially. Despite the sequential downturn in 5G revenue, we believe MTS is well positioned to benefit as existing Doc Design Wins grew to revenue. Communication sales represented 11.1% of our total third quarter 2019 revenue. GAAP gross margin was 55.2% 10 basis points higher than the second quarter of 2019 40 basis points lower than the third quarter of 2018. Our GAAP operating income was $30,000,000 compared to $20,100,000 reported in the second quarter of 2019 and $33,500,000 recorded in the third quarter of 2018. Non GAAP gross margin for the second quarter of 2019 was 55.6%, matching the gross margin reported for the 2nd quarter 2019, but 50 basis points lower than the third quarter from a year ago. Our non GAAP operating income was $51,400,000 compared to $43,700,000 reported in the prior quarter, and $49,200,000 reported in the third quarter of 2018. Let's review our operating expenses. Partners GAAP operating expenses were $63,100,000 in the third quarter of 2019 compared with 63 point $1,000,000 in the second quarter of 2019 $55,500,000 in the third quarter of 2018. Our non GAAP third quarter 2019 operating expenses were $42,500,000, up from the $40,300,000 we spent in the second quarter of 2019 and up from the $40,500,000 reported in the third quarter of 2018. The difference between non GAAP operating expenses and GAAP operating expenses for this quarter to test here our stock compensation expense and income or loss on an unfunded deferred compensation plan. For the third quarter of 2019, total stock compensation expense, including approximately $641,000 charge to cost of goods sold was $21,300,000 compared to $22,700,000 reported in the second quarter of 2019. Switching to the bottom line. 3rd quarter 2019 GAAP net income was $29,500,000 or $0.64 for fully diluted share compared with $20,700,000 or $0.45 per share in the 2nd quarter of $20191.6000000 or $0.71 per share in third quarter of 2018. Q3 non GAAP net income was $49,500,000, or $1.08 per fully diluted share compared with $41,900,000 or $0.92 per share the second quarter of 2019 $47,300,000 or $1.06 per share in the third quarter of 20 18. Only diluted shares outstanding at the end of Q3 2019 of 45,800,000. Now let's look at the balance sheet. Cash, cash equivalents and investments were $422,000,000 at the end of the first quarter of 2019 compared to $369,700,000 at the end of the second quarter of 2019. For the quarter, MPS generated operating cash flow of about $72,000,000 compared with Q2 twenty nineteen operating cash flow of $44,100,000. 3rd quarter 2019 capital spending totaled $9,100,000. Accounts for receivable ended the third quarter of 2019 at $58,300,000, representing 31 days sales outstanding, which was 2 days lower than 33 days reported at the end of the second quarter of 2019 and 3 days lower than the 34 days at third quarter of 2018. Our internal inventory at the end of third quarter 2019 were $135,600,000, down from $143,600,000 at the end of the second quarter of 2019. Days of inventory of 163 days at the end of the third quarter of 2019 were 30 days lower than at the end of the second quarter of 2019. The drop in inventory, both in terms of dollars and days, represent management's decision to slow wafer start within the funds to the market downturn. Under normal circumstances, we are comfortable carrying a higher level of inventory to support our accelerated rate of revenue growth. Given that most of our products are not customer or application specific, and carry minimal obsolescence risk. I would like to turn to our outlook for the fourth quarter 2019. We are forecasting Q4 revenue in the range of 160 to $166,000,000. We also expect the following: GAAP gross margin in the range of 54.8 55.4%. Non GAAP gross margin in the range of 55.2% to 55.8%. Total stock based compensation expense of $18,300,000 to $20,300,000, including approximately $600,000 that would be charged cost of goods sold. GAAP R and D and SG and A expenses between $56,200,000 $60,200,000. Non GAAP, R and D and SG and A expenses to be in the range of $38,500,000 to $40,500,000. The mitigation spend should range between $80,000 to $1,200,000. Interest income is expected to range from $1,400,000 to one $600,000 fully diluted shares to be in the range of 45.8 to 46.8 for themselves. Hello? Yes, sir. Are we ready for questions? Our first question comes from the line of Rick Schafer of Oppenheimer. Your line is open. Hi guys. Congratulations on a nice quarter and another another tough set up, but a nice job on the quarter. I guess my first question is really compute industrial auto. I mean, all these sort of high margin kind of new verticals for you are all up nicely. I think double digits year over year. Maybe could you talk a little bit about relative strength by region? Or any color you could give there? And if you had any 10% customers or anybody close to 10% any particular customer strength in the quarter? Sure. Let me throw that on. It wasn't very clear. It's a moment, okay. I think we, to restate Rick's question, if that was helpful, yes, so when we're speaking with him is that, he was observing that there's good relative strength in the quarter for automotive, computing and industrial. And so he was looking for a little bit of color as far as the geographic distribution and if there are any 10% customers for what the level of concentration was. So yes, okay. So, Rich, you put your finger on the exact right mix of what drove our Q3 performance. So if I could comment first on the computing and storage, you know, compute the storage for us in the first half, exhibited some weakness over what it has done in 2018. And we saw in Q3, strong momentum across all of our lines of business, And there was no individual customer concentration to grow that, more geographic. So that was nice to see just because the first half of this year, there has been weak demand. In industrial, that has been an area that has been benefiting or maybe I should say affected by ordering ahead of demand today, and some of that is occurring in China anticipating any further trade actions. So, that was pretty concentrated with power sources of surveillance. Automotive was very broad based, as far as seeing a beginning of sales in new model years to Europe and Korea as well as return at some ordering levels in China. And while I don't have an exact at my fingertips, I do not believe we have any 10% customers that we'll be expecting before. Okay, thanks. And I apologize if it's difficult to hear me. This my second question, my follow-up is just on On 5G, it's obviously becoming a bigger contributor to the NPS growth story. And I know you talked about it being softer in the recent quarter, but obviously the order book looks good. So what's your visibility on reacceleration in your 5G business? And maybe you could provide a little bit of color about what that dollar content opportunity is for you guys, some color on your competition there? I mean, maybe share assumptions or expectations? Just some general color on 5G, please. Okay. General of 5G, yes. Okay. All the time, Gs, what we see is that, our customer is telling us with a small threat, okay? And as we bring together at this point in the map. Okay. And I think this is very initial, when second is kind of lengthy. And for the next few quarters, our forecast, our customers give us our all forecast is to say how to put in materials. And So whether from the last few quarters to this quarter to the next few quarters, like we Our guess is that it's still at the initial rent that cannot look at. And the rent is not very smoothly, kind of, it's plenty. Okay, Michael. Any comment on the sort of dollar opportunity of dollar content opportunity when you think about a 5G base station? For NPS? For us, it's difficult to is because we provide a very basic building block on the, on the base station to single channel and to central patients and which provides, which is a basic building block. We actually don't know where the product ended up. Okay, understood. Thanks and congrats again. Thank you. Our next question comes from the line of William Stein of SunTrust. Your line is open. I think it's we're all having trouble hearing each other perhaps. So I'll speak really slowly. I'm hoping you can comment on channel inventory levels, perhaps remind us what the target level is what that level of inventory was earlier in the year, where it was in Q3 and perhaps where you expect it to go in Q4? Sure. So, at the beginning of this year, And let me open up with is that we haven't disclosed the range that we are we managed to. We talk in more qualitative terms. But certainly, as we looked at the end of Q1, We finished above our normal range. And, a lot of that had to do the fact that in the quarter, we had hired sales in January March. With the March sales being disproportional to even spread, the distributors did not have enough opportunity to sell through to end customers. So that's why that was up. In Q2, we had a more even distribution and days in the channel return to normal at the upper end, but normal range. And then in the current quarter, we actually saw a terrific sell through. And again, this is broad based in all of our geographies. And, what we observed is that we're actually at the low end of our range as we finished Q3. So I'd make a similar comment as I did on the inventories in the book, but that's probably not the level that we care to sustain it. But it certainly was positive to show that the strong sell through. Yes. Let me remind everybody. I think that in early in the regard to inventory, in early this year in, in 1 of, I think, in January, February, any talk And we commented that the outlook was uncertain and our inventories build up That was due to the last December quarters that we anticipated the normal roofs for NPS is over 20% growth for the entire 2019. And so in February, we start to reduce our wafer stock. And we're asking to roll criticism and also we don't see a clear futures. And then now we ended up at the very low inventory days. And and with low inventory, we have to build it up again. And this is referring to the inventory that's on our book. Government channel. Great. If I can have one follow-up, please. I think we're all very interested in your expectations for growth in the coming year. I'm not expecting you to guide necessarily for next year, but I think we have an expectation that through a cycle, you post something on the order of up 20 next year is going to be typical or reflect a recovery in the broader market so you could at least get close to that number? Or do you think that the current trade situation or anything else would hinder that and keep you materially below it? Yes. Good question. And, although this quarter, we delivered a good number with the we don't want to forecast an quarter of next, no, we want to focus the next year. And throughout this period, and I think, last year, and we can't we said that it's not very clear. Now and, but we did say that all the greenfield products for for NPS of Greenfield Market Segments rather, start to grow. And, at the initial growth, since it's, we just said that it's 5, even with a 5 year ramp, it's not very smooth. Not very, it's kind of lengthy. And, we this quarter, we see a 5G, then there's knowledge as good as expected. And now the next few quarters at the porting, And, but we do see, all these, we see this very similar to other segment in auto in industrial. And so next year, we can forecast. So what's the growth rate? I think it will be, will be better than the industry by 10% to 15%. Good enough. Thank you very much and congratulations on the good results and outlook in this tough environment. Thank you. Thanks, Will. Thank you. Our next question comes from the line of Torres Lambert of Stifel. Your line is open. Yes. Let me echo the congratulations and especially on the record cash flows. So first question, And maybe just to get a clarification in here, so right now your inventory days are at $160,000,000. So what you're saying is that they will probably go back up again in Q4 but will they sort of go back to the level you were in Q1 of this year? Yes. The range that we're trying to manage between $160,000,000 to 100 days for inventory on our balance sheet And that may be a little bit higher than what industry appeared once would be. But again, just going back to Michael's point, that we're growing at 10 to 15 percentage points ahead of the market. And as a result, this growth is coming from, greenfield opportunities with new products in new markets. And so what we do is we invest above the initial demand so that we have positive experiences with our customers. Very good. And, yes, I mean, that's obviously why you had record cash flows this quarter, right? Because that inventory started to selling through. So that's great. Second question is on Automotive. So it's about $100,000,000 a year business now. And I think there's no secret that you're starting to gain a lot of traction directly with some of the OEMs and you then mentioned one big contract. So as I think about the $100,000,000, that does not include any of the sort of direct OEM relationships that you've started to have, correct? Troy, I apologize. I didn't know which end market you were talking about. Automotive? Yes. $100,000,000 business now, yes. Okay. And so the question then is, how much exposure do we have to the OEM No, no, no. The question is, you've started to establish some deeper relationships with the OEMs. I'm wondering if that's sort of already contributing to that $100,000,000 run rate or is that all new business that's still on the comp? So let me say back the question because we're having difficulty hearing you in apologize about that. So you're saying that on the $100,000,000 run rate as far as what is our exposure to the OEMs, and how much of that is, is there still rapidly a question Yes, Tom. Yes. I mean, that's fine. Yes. And I'm just trying to understand how much of that business is coming from your more recent wins with bigger OEMs? Reason wing and as a reason award, which is a relatively large project from a Tier 1 from a Tier 1 automotive supplier. It's a lot it's a relatively large large project. These will be in the next 2 or 3 years. And So far, the existing revenues, all ramp up from a tier 2, some of them very little from a tier 1. And as we foresee in the next 6 to 9 months, we will win a lot more this type of a large project. So that will pave the next 2 to 3 switch to even 4 years away. That's exactly what I was asking. Just one last question and I'll ask a more simple question. When will you be in production with 48 volt? It's not in now. Thank you. Our next question comes from Alessandra Vecchi of William Blair. Your line is open. Hi, everyone. Congratulations also on an amazing quarter in this environment. Just on the OpEx side, you guys have done a phenomenal job sort of holding that steady and managing it. How do we sort of think about balancing your operating expenses going forward with future revenue growth? And then additionally, sort of similar question on the gross margin front, as you guys similarly have done an outstanding job holding those steady, what do we think how do we think about the puts and takes of potential margin improvement next year or 2021? I think as we stick our model, which I a wrestle with our large shareholders. So I want us to spend more money and they want to be the EPS growth as well. And, but here we stick our models. And, which is now, I think at this year's, we're slightly above, right? Yes, it's, again, Alex, it's a fair question that we have a model which believe our investors are familiar with, where we want to be able to provide operating leverage along with the revenue growth However, in the current market conditions, we what we've done is we've tried to hold our gross margin steady while continuing to invest in certain of these where we consider long term and strategic investments that will position MPS for long term. Okay. That's very helpful. And then similarly, I apologize if I didn't hear it. But did you give any color on sort of what end markets you expect to be strongest or weakest within the Q4 guide? When you look at Q4, there's actually a continuation of some of the positive trends that we saw in Q3 with respect to, from Houston storage and also with automotive. And as I've said before, we think that some of industrial had to do with pull ins. And I'd look at the 5G, just to echo Michael's point there, is that this is the lumpy business, and well, it had a down Q3 we still believe that that debt and market has a lot of traction. So the Q4 would be better. And, as a consumer, it's like a normal will be a little bit slightly lower. And other ones, we'll keep it very similar level. Very similar. Okay. Thank you. That's very helpful. That's it for me. Thank you. Thank you. Our next question comes from David Williams of Loop Capital. Your line is open. Thank you. And let me echo the congratulations guys. It's impressive quarter and guide and happy to see that. But was hoping you might be able to give maybe a little more information on your 48 volt architecture, maybe the benefits there. And but that opportunity be for you and maybe what traction that you've already begun to see there? Okay. The foreseeable Foniable systems, and we started 4, 5 years ago. That's what we see, that's the trend. And In the foreseeable system, there's many, components that we that we shipped. And, we saw the shipment about a year ago in, for, for some power components. And for the Jeep for cooling fully able to to the GPU, those are the products and we start to win. What do you think that total opportunity could be if we look at year or 2 outlook, what do you think the revenue potential is there? We we have actually, we don't have any year. So, like, where is the IR? What's the artificial intelligence market? Okay. And what are market size. And for us, it's a very big and that was certainly moved NPS to revenue details. And we don't sort of effort to find out and how big it can be. Certainly, in 100 of $100,000,000. And in the data centers, and the adapting rates in the 48 Volt at the income piece. Okay. We don't see, many data centers going to Forti Abel. I got other than that, one, okay, I can think of it in the, the advocating 40 ables and that's still still their majority of whatsoever, still running at that level. David, if I could add one more comment is I think that, 48 volts is the direction that nearly all data centers, whether it's for supercomputing or for e commerce or artificial intelligence we'll be migrating to. That's what we believe. And we believe in both market segments, sooner or later, gave it 2 or 3 years, they will merge 2 to 48 volts. Excellent. And then just lastly for me, can you comment just maybe on the data center inventory? It's been obviously an issue, but what are you seeing now? And maybe from your perspective, are you seeing inventory issues there? Or are you maybe benefiting from just the design wins and specific drivers versus the macro? Well, if you look at it now, all the new product rent for us in the in the equating engine, you mentioned a 40 Eagle that these are new products. In the past, I'll say it again and again, all these new products Our customer take a risk of this new product and we're taking a risk and we don't want to have any problem in the during shipping, during supply, okay, we don't want to have any interruptions with the holidays or with all these unknown issues, we want to build inventory. So we have a more material we can shift. Now we're at the stage. If we have to put a lot of effort to which who do we. And now we have to build a we have to build more inventory. David, were you also talking about the data center as far as whether that was a penetration in new markets? Yes. I was just curious if there was still excess inventories within the data center that had caused some softness prior if that had been mopped up yet? All the data center. Okay. I didn't get that. So I think that the way to characterize this is, it was interesting is that the downturn that we experienced as a result of overcapacity and the data center was broad based. And likewise, with just our one Q3 experience, that also wasn't the individual customer, individual geography, it was an example of very diversified growth. Both in terms of our products, as well as customers. Great. Thanks so much. Appreciate it. Thank you. Thank you. Our next question comes from Quinn Bolton of Needham And Company. Your line is open. Hey guys, thanks for squeezing me in. Wanted to just to start and I know you probably haven't had a lot of time to go through Texas instruments results, but they had a pretty poor outlook, talked about at the midpoint of their December guide, revenue being down 14%. And that's, I think, the 8th quarter in a row where their revenue has decelerated on a year over year basis. If I use Texas in as a proxy for the analog market. It certainly looks like Texas Instruments might be looking into a mid single digit revenue decline in 2020. And so I guess, can you talk about if the analog market is down again next year, how comfortable are you with kind of the street consensus for 18%, 19% growth? And to the extent you're comfortable, can you give us some points where do you think you're seeing growth or where you're differentiated versus some of your broader analog peers. I know it's a big, big question, but let's start there. Sure. At this point, we've only had the opportunity to review the flash report on TI. So I am at a deficit to understand how much of the business was affected by downturn in analog versus other elements of their business. But certainly with the significant of the decrease that they projected, both from Q3 to Q4 along with the difference between them and consensus, I think they're a market driver. We found in 2019 that we're not NPS is not immune to what the market movements are like. We continue to focus on the elements within our control, which is to introduce the new products And as Michael said earlier on this call, we still continue to believe that we can outperform the market at 10 to 15 percentage points but that the market hasn't found its people living in yet. There's a more comparison between the NPS and the CI because they are sulfate. They are the market. We are a very small. We can't, you know, whether we do have a lot of opportunity And, so it's there's no, there's no comparison. And, but for us, I will, we start to building 5% to 10% of even market share in the in the different segments. And, but at the same time, we're also expanding our opportunities. So the growth for us in this market segment is enormous. And we in the we should be much less effective advantage by the macroeconomic conditions. Thanks very much, Michael. The second question I had is, I think in the June quarter, you guys saw one customer that was over 10% of sales and you thought that some of that activity was filled ahead. You were able to provide and hit your guidance for Q3. You mentioned some additional build ahead activity in the Industrial segment here in Q3. In power sources and surveillance equipment. Have you sort of factored that build ahead in Q3 into your 4th quarter meaning that if you did see some unexpected strength and build ahead demand in Q3 that you've sort of tempered those segments in Q4 and that's reflected in your $160,000,000 to $166,000,000 we are in my interview. If we don't know how to be in it already. I think you said it all. Okay. So the answer is yes. Yes, absolutely. Okay. Otherwise, we will miss quarter by quarter. Got it. And then lastly, Michael, just want to come 48 volt, you had mentioned that you've been sampling product, I think, for about a year. I think in the third quarter, GPUs was one of the areas where you saw strength and just wanted to clarify, was that strength in GPU more from your existing 12 volt design wins? Or have you seen, was that GPU strength in Q3 from 48 volt product? No, it's a GPU is a more traditional level. The study is also in, it's not moving the needle yet, but we do see a healthy growth of a revenue stream coming. Got it. Thank you. Thank you. Our next question comes from Matt Ramsay of Cowen. Your line is open. Michael, one relationship that my team has been watching close that MPS has continued to grow is the relationship with Microsoft across the business, maybe you could to the extent that you can, could you give us a little bit of color as to the nature of that relationship strategically and how it might benefit the different segments of the business as you move forward? Thank you. I'll show you. We don't comment, customers. And, but with, with all our customers. In the past, I I said it and that came in, I don't like a very cyclical business, and, which which move our revenue up or down. And, it's not as smooth as we can manage it. In my regard, I made a statement, okay, the one last day, and that's all it's bulk ending. And We wanted for our shareholders. We want to build a model very predictable and a very predictable growth and the top line growth, margin growth. And so in that regard, in the gaining and you have every year or every 2 years and then you have of our extra revenue and then the next 2 or 3 quarters and start to get lowered. Well, that gives us a difficulty. And then our customer said that this is not your favorites. And They also missed it. And, in the following conference call, clarified. Right? We love debit because that's a good money for our shareholders, good values. And not, but that's the only model. That's the only business model. And as the NTS grows, well, revenue grows, and we are going to over $600,000,000 range. And we in the last couple of years, we've seen accelerating growth. And that effect was much, much less. So I love the game. I love it, Jamie. If I can add one additional comment, while we do not talk to individual customers, One thing that I believe separates MTS from our peers and competition is that we're very responsive to our customer requirements. So if they have an engineering challenge, more often than not, they're turning to us in order to find a solution. And as a result, all of our benefit from the innovation and the level of technology that we're putting forward is differentiated. All this by the way, we're very busy. This is not corporate years. Our customers telling us which we provide the best support we provide for best service. Got it. No, I appreciate the sense visibility to the individual customer. As a follow-up question from my side, there's obviously been not on the 5G side, but in just general data center spending over the last 12 to 15 months, there's been some challenges and it seems like the market now is anticipating a reacceleration in cloud spend in the server market. You guys have some great content with certain Intel based servers, but my understanding is there's some diverse the of that customer base into other computing providers. Maybe you could talk a little bit about the data center customer base overall and how you're expecting that business to grow in the next few quarters? Sure. I think, strength of MPS is diversity We have all kinds of different technologies. You're suitable for different solutions. So, right now, we tend to think very much in terms of the e commerce data center model And when that model is very solid and is going to continue for several generations to come. What we're seeing, as Michael mentioned earlier, the initial, growth through artificial intelligence. And it's hard to really size what those market opportunities look like. But here again, we're positioned to take advantage of it. When we look at some of the applications, data center support of 5G, we're all feel very well positioned. And that's also at the very initial stage of growth. So, I think that when you look at the customer relationships we develop and how adaptive our technology is for different power solutions, I think we're well positioned anybody to take advantage of the new developments in the evolving market. Our next question comes from the line of Ross Seymore of Deutsche Bank. Your line is open. Hi guys. Thanks for letting me ask a question or 2. First on the 5G side, just want to understand a little bit better of where you guys are playing there. Is the power management that you're doing largely for one form of processor versus another? Are you more FPGA related related ASAP related? Is there any kind of evolution of how you see that progress as people are a little bit worried that the FPGA side might come down and other sorts of processors would backfill and trying to figure out how if that does occur, it would impact or benefit monolithic. The answer is all about. I don't want to be a baker, but then that's a we try to figure out where where our product goes. Like, we just to remind just to remind everybody, our product to the fundamental block. And that's a power supply block. All the items that you mentioned They only have power. And our customers typically design the several, several sides of this power power block. With our product in the, so Windish, each segment from a transmitter to the processing or the data of data processing to the communication, to the fiber line. To optical lines. They all need them for the power. And we they don't if we're within their company, we've become a standard product, standard component that their design engineers designed into the is a, in systems. So we don't we actually really don't know where our product ended up. I think, you have 2 parts to your question there, Ross. The first is, sort of, we have an initial RAM and how defensible or predictable is that. And I think we've been very clear that we're at the early stages of 5G and it's really hard to, foresee how that's going to develop. But to my point, as far as the long term when this land does occur, I think that we get to take advantage of all aspects of 5G. And that's what we're looking forward to having. Got it. My next question is, wouldn't be an earnings call at monolithic if I didn't ask about inventory. So congratulations on that coming down. I lost, I told you, like, in the, in the, in the, February call, after last bucket, not the fair question. I feel we do it as a little too high to because we don't know what the market is. I'm going to give you grief when it goes up. I have congratulate you when it comes down. But not to blow too much sunshine at you guys. When you talked about it needing to go back up, How do I 1, is that $1 or a day's comment? And secondarily, how do I reconcile kind of controlling utilization and lowering utilization with inventory rising? Sure. So if you think about, what you do to manage inventory levels and you start with the wafer start, So back in February, we, really starting to ratchet down, wafer starts and we did that an extended period of time that wasn't just one month because over the last six months. Well, those wafers are now coming into our balance sheet, we're receiving them. And it's at a much lower level, than we had historically seen in trendoids have been. And yet we had at the same time okay demand, and there's a lot of good sell through as well. So that means that our finished goods started to come back into alignment as well. So when we look at the sort of composition, We're a little bit light on the raw materials of work in process, and we probably hit about the right level of finished goods. When you look at the ramp that we expect for Q2, Our next question comes from the line of Chris Caso of Raymond James. Your line is open. Yes, hello. Can you guys hear us now? Operator, we may have lost an management team. I believe we did. Ladies and gentlemen, please standby. I apologize there may be a slight delay in today's conference. Please hold and the conference will resume shortly. Thank you for your patience. And speakers, you may proceed. Bernie and Michael back online. We'll go ahead and go to the next question. Ross Seymore from Deutsche Bank. Your line is open. Hey guys, can you hear me? It's fine. Thank you. Oh, now it's perfect. Yes. I guess you were halfway through and you probably continued talking even though we couldn't hear you. The inventory side of things, Bernie, you were walking through the utilization and the WIP versus the raw materials is all of that. I think the punch line to it was what you didn't say. Does that mean that dollars of inventory are going to start going back up days of inventory both in any sort of target range that you expect to get to? Again, while we quote our range a day between $160,000,000 $180,000,000, the fact is that we manage internally to dollars attendant and anticipating wafer starts about 6 to 8 months in advance of when the revenues are expected to ramp So right now, we're starting to put wafer sorts in for, in support of business for Q2 and Q3. Of 2020. And so in that regard, we expect to sort of see a replenishing on a dollar basis And then obviously, as you look at the cyclicality of our revenues where normally Q1 is about 2 or points lower than Q4, that when the lower denominator days would also go up because of that. So my comment was really intended to talk in terms of dollars. And then I think you'd have to reflect the impact on the days given our seasonality Debbie. Got it. Then 2 relatively quick ones I just wanted to understand. One, the litigation expense seems like guided to be about double of what it usually is. Is that something a court case coming due or is it something that is one time in nature or is that a new base we should be looking Yes, we have a one time. It's a one time Kenny. And it's we have a trial date coming up here in the next quarter or so. Got you. And then the last quick one is IP security camera side of things. I just wanted to I know you commented on that earlier, but when you said that, that's we're building inventory. Is that something that was meant to be a retrospective comment for the first half of this year or second quarter, whatever have you? Or did you see that as an ongoing benefit to your revenues in the 3rd quarter? And if so, what is it, what do you believe that will do in the 4th quarter? Well, again, this speaks to sort of the market uncertainty, that we're all experiencing seeing. And, I think that if I look at the trend line for industrial, where we report this revenue stream, It has been significantly higher than its normal run rate for us. And so I think you can infer that there were pull in, and that could have some impact on how this particular segment end market performs in the next quarters here. We've heard, different different messages from our customers, from our end customers. And that the good news is they have a few new launch projects and, start to ramp. And the same times that we also heard, they're pulling because the tax, because the tax. And So again, that was a we're building very Avino's basic building blocks. And were not an intel, so they're building a building processor. And then you can see how many servers, how many PPs, they they build. We, we can help. I was still a very small small cost of the and higher fields of materials. Got it. All right guys. That's it for me. Thank you. Thank you. Our next question comes from Chris Caso of Raymond James. Your line is open. Yes, thank you. Good evening and good morning for you guys. First question is with regard to the 10% plus customer that you had in the 2nd quarter. And it sounds like that customer wasn't a 10% customer in the third quarter. Could you give some color about, what was going on there? And, has the revenue level at that customer now normalized as you look forward into the Q4 guidance? Yes. I think that we don't talk about individual customers, but since you had reported in our 10 Q the Q2, we'll say that we have a number of relationships beyond even this secret customer that are very broad based and where they can have multiple product ramps to the recurring at the same time. And that is clearly what transpires here. Yes. And, we don't have consistent, more than 10% customers, yes. They this quarter we don't have it, okay, and we don't have it. And in the past, I don't remember whether we reported an and there's a one for a certain week and a certain period of time of day spots over simple things. But it can be a different customer. And overall, we have a very long tail of a middle of a customer, that's due to our our business. We build a building block and many customers, they can use that. Got it. Thank you. I guess the other the last question is, with respect to your goal of track goal. The way I'm tending to think about it, Tommy, if you agree, is that you'd need to generate somewhere between $75,000,000 $90,000,000 of incremental revenue, perhaps your run rate business grows at the market rate and this would be on top of that. And I guess if that's the right framework to think about it. What gets you to that? What sort of things can you point to as you look into next year? That drive that visibility for that level of design win as you look into next year? It's a very simple business process. And we have, product line, we have a sales, we, Joe sales group. And, we have a product line we view there. And, production for the next couple of years and, more in the longer term. And, sales is more immediate than the next few quarters. And, we gather all these members and the members We're checking against the product line and also sales groups and also, and we see some of why swing in the last 9 months and due to the tariff, due to even more than last year or so. And, there's a much more, upward than a previous tool. 2 or 3 years. That's because due to tariffs, due to salamoo policies. And those are what we cannot predict. And now we're looking for next year, why we can say we can do that? And one is based on the historical metrics. And that we always can, we can do that. And What is that real theory behind it? And if it is more empirical than really a theory, than a theory. And On the other hand, we're looking at all these sales numbers, these sales numbers that sometimes the much is bigger than we expected. And Do we believe that? Okay. And we can grow a lot more than that even at the beginning of the year, in January, we forecast to grow more than 20%. And So the reality is very different. So we to our shareholders, We said that that would be based on the historical numbers, we can close this much. All right. All right. Thank you. Okay. Thank you. Thank you. At this time, I'd like to turn the call back over to Bernie Breggin for any closing remarks. Sir? Great. I'd like to thank you all for joining us for this conference call and look forward talking to you again during our fourth quarter conference call, which will likely be in early February. Thank you and have a great day. Thank you very much. Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.