Ladies and gentlemen, thank you for standing by, and welcome to Monolithic Power Systems Q3 2019 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question and answer session. To ask a question during the 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, Chief Executive Officer of Monolithic Power Systems, Michael Hsing. Sir, please go ahead.
Thank you. Hello, everyone. Good morning from Shanghai. We held our third quarter board meeting in a newly established custom support and marketing center for China. We had our board members tour the facility and oversee the operation here. In the last few days, we received many messages that have showed overwhelmed support in response to a recent publication. I'm representing MPS management to express our deep appreciation for your trust and support. Our reaction to this publication is that it is malicious and manipulated. We will not bore your intelligence to go through the details. Lastly, I assure you we will take appropriate action, including legal action, against any malicious and unlawful activity damaging MPS' reputation, and I will share all the details. Thank you again. Now, I let facts speak itself. Bernie.
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 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 statement contained in the Q3 release and in our SEC filings, including our Form 10-K filed on March 1st, 2019, and Q2 2019, Form 10-Q, filed on August 2nd, 2019, both of which are accessible through our website at 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 Q3 2018, Q2 2019, and 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 one year, along with the earnings release filed with the SEC earlier today. MPS achieved record third quarter revenue of $168.8 million, 11.8% 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, third quarter revenue of $52.8 million increased $11.2 million, or 26.9%, from the second quarter of 2019. Computing and storage revenue represented 31.3% of MPS' third quarter 2019 revenue. The sequential quarterly revenue growth was broad-based, with sales gains recorded in power management for CPUs, high-end notebooks, servers, and storage.
Coupled with our recent design wins using QSMOD, quantum state modulation, in server and AI applications, MPS 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 one of the highest levels of energy efficiency with the smallest form factor of its class. Our customers have validated our solution, which we believe will win market share in this important segment. Third quarter automotive revenue of $24.4 million grew 15.1% over the second quarter of 2019, reflecting initial sales of products for infotainment, smart lighting, ADAS, and autonomous driving. In addition, we were awarded a relatively large contract and a major Tier 1 automobile supplier. We expect to begin generating revenue from this relationship in the next two to three years.
Automobile revenue of 14.5% of MPS's total third quarter 2019 revenue. Third quarter 2019 industrial revenue of $28.9 million, increased 28.6% from the second quarter of 2019, due primarily to increased revenue for security systems, power sources, and industrial meters. Much of this growth is project-based, which can vary significantly by quarter. Industrial revenue represented 17.1% of our total third quarter 2019 revenue. In our consumer markets, revenue of $43.9 million was essentially flat with the second quarter of 2019 and represented 26.0% of our second quarter 2019 revenue. Sequentially, third quarter revenue reflected a seasonal increase in certain legacy consumer markets, offset by decreased sales of products for wearable applications and set-top boxes. Third quarter 2019 communications revenue of $18.8 million 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 MPS is well-positioned to benefit as existing design-in wins move 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 and 40 basis points lower than the third quarter of 2018. Our GAAP operating income was $30.0 million compared to $20.1 million reported in the second quarter of 2019 and $33.5 million reported 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 second quarter of 2019, 50 basis points lower than the third quarter from a year ago. Our non-GAAP operating income was $51.4 million compared to $43.7 million reported in the prior quarter and $49.2 million reported in the third quarter of 2018.
Let's review our operating expenses. Our GAAP operating expenses were $63.1 million in the third quarter of 2019, compared with $63.1 million in the second quarter of 2019 and $55.5 million in the third quarter of 2018. Our non-GAAP third quarter 2019 operating expenses were $42.5 million, up from the $40.3 million we spent in the second quarter of 2019 and up from the $40.5 million reported in the third quarter of 2018. The difference between non-GAAP operating expenses and GAAP operating expenses for the quarters discussed here are 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 charged to cost of goods sold, was $21.3 million, compared to $22.7 million reported in the second quarter of 2019.
Switching to the bottom line, third quarter 2019 GAAP net income was $29.5 million, or $0.64 per fully diluted share, compared with $20.7 million, or $0.45 per share in the second quarter of 2019, and $31.6 million, or $0.71 per share in the third quarter of 2018. Q3 non-GAAP net income was $49.5 million, or $1.08 per fully diluted share, compared with $41.9 million, or $0.92 per share in the second quarter of 2019, and $47.3 million, or $1.06 per share in the third quarter of 2018. Fully diluted shares outstanding at the end of Q3 2019 were 45.8 million. Let's look at the balance sheet. Cash, cash equivalents, and investments were $422.0 million at the end of the third quarter of 2019, compared to $369.7 million at the end of the second quarter of 2019.
For the quarter, MPS generated operating cash flow of about $72.0 million, compared with Q2 2019 operating cash flow of $44.1 million. Third quarter 2019 capital spending totaled $9.1 million. Accounts receivable ended the third quarter of 2019 at $58.3 million, representing 31 days sales outstanding, which is two days lower than the 33 days reported at the end of the second quarter of 2019, and three days lower than the 34 days at the third quarter of 2018. Our internal inventories at the end of the third quarter of 2019 were $135.6 million, down from $143.6 million 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 starts in response 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 of 2019. We are forecasting Q4 revenue in the range of $160 million-$166 million. 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%-55.8%. Total stock-based compensation expense of $18.3 million-$20.3 million, including approximately $600,000 that would be charged to cost of goods sold. GAAP R&D and SG&A expenses between $56.2 million and $60.2 million.
Non-GAAP R&D and SG&A expenses to be in the range of $38.5 million-$40.5 million. Litigation expense should range between $80,000-$1.2 million. Interest income is expected to range from $1.4 million-$1.6 million. Fully diluted shares to be in the range of 45.8 million-46.8 million shares. In conclusion, we continue to execute and deliver the results that speak for themselves. I will now open the phone lines for questions. Hello?
Yes, are we ready for questions?
Yes.
Thank you. As a reminder, to ask a question, you will need to press *1 on your telephone. To withdraw your question, press the # key. Please stand by while we compile the Q&A roster. 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 tough setup, but a nice job on the quarter. I guess my first question is really compute, industrial, auto, 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 sort of start that off. It wasn't very clear. It's a movement. I think to repeat Rick's question, if that would help. Is it Rick or Rick? Yeah. I'll put him with Rick. He was observing that there's a good relative strength in the quarter for automotive, computing, and industrial. He was looking for a little bit of color as far as the geographic distribution and if there were any 10% customers, or what the level of concentration was. Yeah. Okay. Rick, you put your finger on the exact right mix of what drove our Q3 performance. If I can comment first on the computing and storage.
Compute and storage for us in the first half exhibited some weakness over what it had done in 2018. We saw in Q3 strong momentum across all of our lines of business, and there was no individual customer concentration that drove that, nor geographic. That was nice to see, just because the first half of this year, there had 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 action. That was pretty concentrated in power sources and 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 a return of some ordering levels in China.
While I don't have an exact at my fingertips, I do not believe we have any 10% customers that we'll be discussing this quarter.
Okay, thanks. I apologize if it's difficult to hear me. My second question or my follow-up is just on 5G. It's obviously becoming a bigger contributor to the MPS growth story. I know you talked about it being softer in the recent quarter, but obviously the order book looks good. What's your visibility on re-acceleration in your 5G business? Maybe if you could provide a little bit of color about what that dollar content opportunity is for you guys, some color on your competition there, maybe share assumptions or expectations, just some general color on 5G, please.
Okay. General color about 5G?
Yes.
Okay. All the 5G, what we see is our customers telling us there's a smooth ramp. Okay. As Bernie said, at this point of the ramp. Okay. I see this as very initial ramp, which it is kind of limping. For the next few quarters, our forecast, our customers give us our forecast as they try to pull in materials. Whether from the last few quarters to this quarter to next few quarters, our guess is that it's still at the initial ramp, and the ramp is not very smoothly. It's kind of limping.
Okay, Michael, and any comment on the sort of dollar opportunity, dollar content opportunity when you think about a 5G base station for MPS?
For us, it's difficult to capture because we provide the very basic building block. On the base station to a single RAN and to central stations, we provide just a basic building block. We actually don't know where the product ended up.
Okay, understood. Thanks, and congrats again.
Thanks, Rick.
Yeah.
Thank you. Our next question comes from the line of William Stein of SunTrust. Your line is open.
Great. I think 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?
Yeah
where it was in Q3, and perhaps where you expect it to go in Q4.
Sure. At the beginning of this year, let me open up with, is that we haven't disclosed the range that we manage to. We talk in more qualitative terms. Certainly as we look at the end of Q1, we finished above our normal range. A lot of that had to do with the fact that in the quarter, we had higher sales in January and March, with the March sales being disproportional to an even spread. The distributors did not have an opportunity to sell through to end customers. That's why that was up. In Q2, we had a more even distribution, and days in the channel returned to normal, at the upper end of the normal range. In the current quarter, we actually saw a terrific sell-through. Again, this is broad-based in all of our geographies.
What we observed is that we're actually at the low end of our range as we finish Q3. I'd make a similar comment as I did on the inventories on the books, that that's probably not the level that we care to sustain at, but it certainly was positive to show the strong sell-through.
Yeah. Let me remind everybody, I think that in early, and regarding to inventory, in early this year in, I think it's in February, annual talk, and we commented that the outlook was uncertain and our inventory build-up, that was due to in last December quarters, that we anticipated the normal growth for MPS is over 20% growth for the entire 2019. In February, we start to reduce our inventory stock and reacting to more criticism, and also we don't see a clear futures. Now we ended up at the very low inventory days, and with low inventory, we have to build it up again.
This is referring to the inventory that's on our books, not in the 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 per year. Do you think 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?
Yeah. Good question. Although this quarter we deliver a good number, we don't want to forecast the next quarter. No, we don't want to forecast the next year. Throughout this period, and since last year, and we said it's not very clear. We did said all the greenfield products for MPS, or greenfield market segments rather, they are start to grow. At the initial growth, since it was, we just said it, even with 5G ramp, it's not very smooth. It's kind of lengthy. This quarter, we see 5G, and it's not as good as expected. Now the next few quarters start to pull in. We see that's very similar to other segments in auto, in industrial. Next year, we can't forecast what's the growth rate. I think it will be better than the industry by 10%-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 Tore Svanberg of Stifel. Your line is open.
Yes, let me echo the congratulations and especially on the record cash flows. First question, maybe just to get a clarification in here. Right now your inventory days are at 160. What you're saying is that they will probably go back up again in Q4? Will they sort of go back to the level you were in Q1 of this year?
Yeah. The range that we're trying to manage between is 160 to 100 days for inventory on our balance sheet, and that may be a little bit higher than what industry or peer norms would be. Again, just going back to Michael's point, is that we're growing at 10 to 15 percentage points ahead of the market. As a result, this growth is coming from greenfield opportunities with new products and new markets. What we do is we invest above the initial demand, so that we have positive experiences with our customers.
Very good. Yeah, that's obviously why you had record cash flows this quarter, right? Because that inventory started to sell through. That's great. Second question is on automotive. It's about $100 million 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 even mentioned one big contract. As I think about the $100 million, that does not include any of the sort of direct OEM relationships that you've started to have, correct?
Tore, I apologize, I didn't know which end market you were talking about.
Automotive.
Automotive? Okay.
Yeah. $100 million business now, yeah.
Okay. The question then is how much exposure do we have to the OEMs?
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 million run rate, or is that all new business that's still on the come?
Yeah.
Yes. Let me play back the question because we're having difficulty hearing you, and I apologize about that. You're saying that on the $100 million run rate, as far as what is our exposure to the OEMs, and how much of that is I'm still grappling with the question. Yeah.
Yeah. That's fine. Yeah. I'm just trying to understand how much of that business is coming from your more recent wins with bigger OEMs.
Oh. Well, yeah. Okay. Recent win and the recent award, which is a relatively large project. From a tier 1 automotive supplier. It's a relatively large project. These will be in the next two or three years. So far, the existing revenue all ramped up from a tier 2, some of the very little from tier 1. As we foresee in the next six to nine months, we will win a lot more these type of a large project. That will pave the next two to three to even four 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 starting now.
Great. Thank you.
Thank you. Next question comes from Alexandra Vessey 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? Then additionally, sort of similar question on the gross margin front, as you guys similarly have done an outstanding job holding those steady, 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 wrestle with our large shareholders, so I want to spend more money and they want to see the EPS growth as well. Here, we stick our model, which is now I think this year we're slightly above, right?
Yeah. It's, again, Alex, it's a fair question. We have a model, which I 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 condition, what we've done is we've tried to hold our gross margin steady, while continuing to invest in certain of the, what we consider long-term and strategic investments that will position MPS for the long term.
Okay. That's very helpful. 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 computing storage and also with automotive. As I've said before, we think that some of industrial had to do with pull-in.
Yes
I look at the 5G, just to echo Michael's point there, is that this is a lumpy business. While it had a down Q3, we still believe that that end market has a lot of traction.
The Q4 will be better, and the consumer, like a normal, will be a little slightly lower.
Yeah.
The other ones will keep a very similar level.
Very similar. Okay. Thank you. That is very helpful. That is it for me.
Thank you.
Thanks, Alex.
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 an impressive quarter and guide, and happy to see that. I was hoping you might be able to give maybe a little more information on your 48 volt architecture, maybe the benefits there and what that opportunity could be for you and maybe what traction that you've already begun to see there.
Okay. The 48 volt systems, we started four or five years ago. That we see that's the trend, and in the 48 volt system, there's many components that we ship. We start a shipment a year ago for some power components and for including 48 volts to the GPU. Those are the products and we start to win.
What do you think that total opportunity could be if we look a year or two out? What do you think the revenue potential is there?
We don't have any ideas on what the IR and what the AI, what the artificial intelligence market, and what the market size. For us, it's very big, and that will certainly move MPS revenue needles. We don't put an effort to find out how big it can be. Certainly $ hundreds of many dollars. In the data centers, and the adoption rates in 48 volts are at the infant stage. Okay? We don't see many data centers going to 48 volts. Other than the one, okay, I can think of, and they're advocating 48 volts, but their majority of the servers are still running at the 12 volts.
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 super computing or for e-commerce or for artificial intelligence, will be migrating to.
That's what we believe. Yeah. We believe in those market segments, sooner or later, give it two or three years, they will merge to 48 volts.
Okay. Excellent. Then just lastly from 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 company specific drivers versus the macro?
Well, if you're looking at now, all the new product wins for us, and including again, you mentioned the 48 volts, these are new products. In the past, I've said again and again, all these new products, our customers take a risk on new products, and we're taking a risk, and we don't want to have any problem during shipping, during supplying. Okay? We don't want to have any interruptions with the qualities or with all these unknown issues. We want to build inventory, so we have more material we can ship. Now we are at a stage, we have to put a lot of effort to who do we ship, and we have to build more inventory.
David, were you also talking about the data center as far as whether that was penetration in new markets?
Yeah, I was just curious if there was still excess inventory within the data center that had caused some softness prior, if that had been mopped up yet?
Oh, the data center.
Okay.
Got you.
I didn't get that.
Yeah.
I think that the way to characterize it, and it was interesting, is that the downturn that we experienced, as a result of overcapacity in the data center was broad-based. Likewise, with just our 123 experience, that also wasn't individual customer, individual geography. It was an example of very diversified growth, both in terms of our products as well as customers.
Great. Thanks much. Appreciate it.
Thank you.
Thank you. Next question comes from Quinn Bolton of Needham & Company. Your line is open.
Hey, guys, thanks for squeezing me in. Wanted to just start. I know you probably haven't had a lot of time to go through Texas Instruments results. They had a pretty poor outlook, talked about at the midpoint of their December guide, revenue being down 14%. That's, I think, the eighth quarter in a row where their revenue has decelerated on a year-over-year basis. If I use Texas Instruments as a proxy for the analog market, it certainly looks like Texas Instruments might be looking to a mid-single digit revenue decline in 2020. 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?
To the extent you're comfortable, can you give us some points where you think you're seeing growth or where you're differentiated versus some of your broader analog peers? I know that's a big question, but let's start there.
Sure. At this point, we've only had the opportunity to review the flash report from TI. I am at a deficit to understand how much of their business was affected by downturn in analog versus other elements of their business. Certainly with the significance of the decrease that's been 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 MPS is not immune to what the market movements are like. We continue to focus on the elements that are within our control, which is to introduce the new products. 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 equilibrium yet.
There's no comparison between MPS and TI, because they are so big. They are the market. We are very small, but we do have a lot of opportunities. There's no comparison, but for us, we started building 5% to 10% all these market shares in the different segments. At the same time, we're also expanding our opportunities. The growth for us in this market segment is enormous, and we should be much less affected by the macro-economy 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 billed 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 fourth quarter guidance, 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 still reflected in your $160 million-$166 million guidance?
Yes. Oh, obviously, yes. We are in a few more, and if we don't know, it has to be in it already.
No, I think you said it all.
Okay.
Okay, the answer is yes?
Oh, yes. Absolutely.
Okay.
Otherwise, we will miss quarter by quarter.
Got it. Lastly, Michael, just want to come back to the 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. Just wanted to clarify. Was that strength in GPU more from your existing 12-volt design wins, or was that GPU strength in Q3 from 48-volt product?
No, GPU is more traditional. It's 12 volt.
Okay.
The 48 volt, it's not moving the needle yet. We do see a healthy growth of the revenue stream coming in.
Got it. Thank you.
Thank you. Our next question comes from Matthew Ramsay of Cowen. Your line is open.
Thank you very much. Good morning over there, guys.
Yeah.
Michael, one relationship that my team has been watching closely that MPS has continued to grow is the relationship with Microsoft across the business. Maybe 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.
Oh, sure, yeah. We have ton of customers, and with all our customers, in the past, I said it, and I don't like it, very cyclical business, and which move our revenue up or down, and it's not as smooth as we can manage it. In that regard, I made a statement, okay, it's one of my favorites, and that was for gaming. We want for our shareholders, we want to build a model very predictable, and a very predictable growth and the top-line growth, margin growth. In that regard, in the gaming, and you have every year or every two years, and then you have a surge of extra revenue, and then the next two or three quarters start to get lower. That gives us a difficulty. Our customers said that this is not your favorite. They also listened.
In the following conference call I clarified. We love gaming because that's good money for our shareholders, good value. That's the only model. That's the only business model. As MPS grows, our revenue grows, and we are going for over $600 million range. In the last couple years, we see the accelerating growth and that affects much, much less. I love the gaming.
If I can add one additional comment. While we do not talk to individual customers, one thing that I believe separates MPS from our peers in competition is that we're very responsive to our customers' requirements. If they have an engineering challenge, more often than not, they're turning to us in order to find a solution. As a result, all of our customers benefit from the innovation and the level of technology that we're putting forward that's differentiating.
Oh, by the way, what Bernie said, this is not corporate BS. Our customers telling us we provide the best support, we provide the best service.
Got it. No, I appreciate the sensitivity 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 re-acceleration in cloud spending in the server market. You guys have some great content with certain Intel-based servers. My understanding is there's some diversity 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. Thank you.
Sure. I think a strength of MPS is diversity. We have all kinds of different technologies that are suitable for different solutions. Right now we tend to think very much in terms of the e-commerce data center model, and that model is very solid, and it's going to continue for several generations to come. We're seeing, as Michael mentioned earlier, the initial growth through artificial intelligence. 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 in support of 5G, we're also very well-positioned, and that's also at the very initial stage of growth.
I think that when you look at the customer relationships we've developed and how adaptive our technology is for different power solutions, I think we're as well-positioned as anybody to take advantage of the new developments in an evolving market.
Thank you very much, guys. All the best.
Thank you.
Thank you. 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 two. 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, ASIC related, ASSP 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 then 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 of that. I don't want to be evasive, but that's we try to figure out where our product goes. Just to remind everybody, our product is a fundamental block, and that's a power supply block. All the items that you mentioned, they all need power. Our customers typically design the several size of this power block with our product. When each segment, from transmitters to the processing of the data processing, to the communication, to the fiber line, to the optical line, they all need those power. Within their company, we have become a standard product, standard component, that their design engineers design these end systems. We actually really don't know where our product ended up
I think you have two parts to your question there, Ross. The first is we have an initial ramp and how defensible or predictable is that. I think we've been very clear that we're in the early stages of 5G, and it's really hard to foresee how that's going to develop. To Michael's point, as far as the long term, when this ramp does occur, I think that we get to take advantage of all aspects of 5G, and that's what we're looking forward to.
Got it. My next question is, it wouldn't be an earnings call at Monolithic if I didn't ask about inventory, so congratulations on that coming down.
Ross, I told you in the February call, I said, Ross, that's a fair question. I feel we view it as a little too high too, because we don't know what the market is anticipating.
Well, if I'm going to give you grief when it goes up, I have to congratulate you when it comes down. Not to blow too much sunshine at you guys. When you talked about it needing to go back up, one, is that a dollars or a days comment? Secondarily, how do I reconcile kind of controlling utilization and lowering utilization with inventory rising?
Sure. If you think about what you do to manage inventory levels, and it starts with the wafer start. Back in February, we really started to ratchet down the wafer starts, and we did that for an extended period of time. It wasn't just one month. It was over the last six months. 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 and trend lines had been. Yet we had, at the same time, okay demand, and there was a lot of good sell-through as well. That means that our finished goods started to come back into alignment as well. When we look at the sort of composition, we're a little bit light on the raw materials for work in process.
We're probably at about the right level of finished goods. When you look at the ramp that we expect for Q2 to-
Guys still there? To ask a question, press *1 on your touch-tone telephone. That's *1 on your touch-tone telephone to ask a question. 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 the management team.
I believe we did. Ladies and gentlemen, please stand by. I apologize. There may be a slight delay in today's conference. Please hold. The conference will resume shortly. Thank you for your patience.
Hello?
Speakers, you may proceed.
Bernie and Michael are 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.
Yeah.
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 versus all of that. I think the punchline 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, and any sort of target range that you expect to get to?
While we quote our range and days between 160 and 180, the fact is that we manage internally to dollars of inventory, anticipating wafer starts about six to eight months in advance of when the revenues are expected to ramp. Right now we're starting to put wafer starts in support of business for Q2 and Q3 of 2020. In that regard, we would expect to sort of see a replenishing on a dollar basis. Obviously, as you look at the cyclicality of our revenues, where normally Q1 is about two or four percentage points lower than Q4, that with a lower denominator, the days would also go up because of that. My comment was really intended to talk in terms of dollars, and then I think you have to reflect the impact on the days given our seasonality.
Got it. Two relatively quick ones I just wanted to understand. One, the litigation expense seems like it's 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 at?
Yeah. We have a one-
This one is not a long time. On the long-term perspective.
It's a one time case, and we have a trial date coming up here in the next quarter.
Got you. Then the last quick one is IP security camera side of things. I know you commented on that earlier, but when you said that those customers were building inventory, is that something that was meant to be a retrospective comment to 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 third quarter? If so, what do you believe that will do in the fourth quarter?
Well, again, it just speaks to sort of the market uncertainty that we're all experiencing. 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. So I think you can infer that there were some pull-ins, and that could have some impact on how this particular segment and market performs in the next quarter or two.
We heard different messages.
Yeah
from our customers, but from end customers, and that the good news is that they have a few new large projects and start to win. At the same time, we also heard they're pulling because the tariff. Again, these are basic building blocks, and we're not Intel building a building processor, and you can see how many servers or how many PPs they build. We can't tell. Our still very small cost to other and high bill of materials.
Got it. All right, guys. That's it for me. Thank you.
Yeah. Thank you.
Thank you. Our next question comes from Chris Caso of Raymond James. Your line is open.
Yes, thank you. Good evening. Good morning for you guys. First question is with regard to the 10%+ customer that you had in the second 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? Has the revenue level at that customer now normalized as you look forward into the Q4 guidance?
I think that we don't talk about individual customers, but since they get reported in our 10-Q for the Q2, we'll say that we have a number of relationships beyond even this particular customer that are very broad-based and where they can have multiple product ramps that are occurring at the same time, and that is clearly what transpired here.
Yeah. We don't have a consistent more than 10% customers.
Yeah.
This quarter, we don't have it, okay? We don't have it. In the past, I don't remember whether we reported it or not, and if there's a one for a certain week and a certain period of time that they spot over 10%, but it can be different customers. Overall, we have a very long tail of a number of customers. That's due to our business. We build the building blocks, and many customers, they can use that.
Got it. Thank you. I guess the last question is, with respect to your goal of growing 10%-15% above the industry, it's sort of an abstract goal. The way I'm tending to think about it, tell me if you agree, is that you need to generate somewhere between $75 million and $90 million 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-in win as you look into next year?
Yeah. It's a very simple business process, and we have a product line, we have a sales, a geographic sales group, and we have a product line review there, and for projections for the next couple of years, and more in the longer term. Sales is more immediate in the next few quarters. We gather all these members, we're checking against the product line and also sales group, and we see some wide swing in the last nine months, and due to the tariff, due to, well, it's more than last year also. There's a much more upward than the previous two or three years. That's because, due to tariffs, due to government policies, and those we cannot predict.
Now we're looking for next year, why we can say we can do that, one is based on the historical numbers, that we always can do that. What is the real theory behind it? It is even more empirical than really a theory. On the other hand, we're looking at all these sales numbers. These sales numbers are sometimes much bigger than we expected. Do we believe that? We can grow a lot more than that. Even at the beginning of the year, in January, we forecast to grow more than 20%. The reality is very different. To our shareholders, we say that's based on the historical numbers, we can grow 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 Blegen for any closing remarks. Sir?
Great. I'd like to thank you all for joining us for this conference call and look forward to 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.