Earnings Call: Q3 2018

Oct 25, 2018

Good day, ladies and gentlemen, and welcome to Monolithic Power Systems, Incorporated Third Quarter 2018 Earnings Conference Call. At this And as a reminder, this conference is being recorded. I'd now like to turn the conference over to Bernie Blagan, Vice President And Chief Financial Officer. Please go ahead. Thank you. Good afternoon, and welcome to the third quarter 2018 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 uncertainty, which could cause results to differ materially from management's current views and expectations. Please refer to the Safe Harbor statement contained in the earnings release published today. Risks, uncertainties and other factors that could cause actual results to differ are identified in the Safe Harbor statements contained in the Q3 earnings release and in our SEC filings included in our Form 10 K filed on March 1, 2018, and Form 10 Q filed on August 2, 2018, 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 margins, operating expense, R and D and SG and A expense, operating income, interest and other income, net income and earnings on both a GAAP and on 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 2017 q22, 2018 and Q3 2018 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 1 year. Along with the earnings release filed with the SEC earlier today. Let me start by saying by telling everyone that our Q3 2018 quarterly revenue of $160,000,000 established another record for MTS. Our 5th high watermark for quarterly revenue in the last six quarters. Likewise, non GAAP gross margin grew 10 basis points sequentially representing the 12th consecutive quarter, MPS's non GAAP gross margin has either expanded or matched the prior quarter's performance. As expected, we reached $160,000,000 revenue milestone, reflecting strength in each of our targeted market segments. Q3 revenue for computing and storage, up 64% year over year. Automotive, up 54% in industrial, up 52%. During the quarter, MPS did experience some unexpected softness in high volume consumer related businesses especially in the Greater China region. However, we still see high demand for these products and remain optimistic and our prospects for high end consumer products. We also gained market share in low end communication segment. We will stay opportunistic in these high volume businesses and focus on growing higher margin products. Looking at our revenue by end market. In our computing and storage market, revenue of $47,700,000 increased $18,600,000 or 64.2% year over year. Growth in the market was broad based when compared to the year ago quarter, with all applications, high end notebooks, cloud computing and storage increasing at rates well above the market average. Computing and storage revenue represented 30 percent of MPS's third quarter 2018 revenue compared with 23% in Q3 2017. 3rd quarter 2018 industrial revenue of $24,900,000 increased $8,500,000 quarter of 2017 primarily due to increased sales for applications and power sources, meters, and security. This market represented 16% of our total 3rd quarter revenue versus 13% in the prior year. 3rd quarter automotive revenue of $19,800,000 grew $6,900,000 or 53.9 percent over the same period of 2017 as a result of increased sales Automotive is MPS's largest SAM opportunity at $7,000,000,000 and we are in the early stages of penetrating this market. In the years ahead, we plan to offer a number of new products for applications and body controls, lighting, infotainment, ADOS and battery management. Automotive revenue was 12% of MPS's total Q3 2018 revenue compared with 12% for increased $3,800,000 or 24.6 percent over the same period of 2017. This represents a combination of share gains in our Revenue from consumer markets of $48,500,000 decreased 6 $800,000 or 12.4% from the third quarter of 2017. Consumer revenue accounted for 30% of our total Q3 revenue compared with 43% in the prior year. While loss of revenue in these high volume consumer markets is likely a reflection of geopolitical or trade policy changes. We did not lose projects and continued to gain market share. GAAP gross margin was 55.6 percent, 10 basis points higher than the second quarter of 2018, and 60 basis points higher than the third quarter of 2017. Our GAAP operating income was $33,500,000, compared to $24,900,000 reported in the second quarter reported in the third quarter of 2017. For the third quarter of 2018, non GAAP gross margin was 56.1% 10 basis points higher than the second quarter of 201840 basis points higher than the third quarter of 2017. Our non GAAP operating income was $49,200,000 compared to $41,400,000 reported in the prior quarter and $38,900,000 reported in the third quarter of 2017. Let's review our operating expenses. Our GAAP operating expenses were $55,500,000 in 3rd quarter compared with $52,700,000 in the second quarter of 2018 $47,000,000 in the third quarter of 2017. Our non GAAP third quarter 2018 operating expenses were $40,500,000, up from the $36,900,000 we set in the second quarter of 2018 and up from $32,900,000 reported in third quarter of were $343,000 compared with a $639,000 expense in Q2 of 2018 $327,000 in Q3 2017. The difference between non GAAP operating expenses and GAAP operating expenses for the quarters discussed here or stock compensation expense and income or loss from an unfunded deferred compensation plan. Total stock compensation including $471,000 charged to cost of goods sold for the third quarter of 2018 was $14,800,000 compared with $15,900,000 recorded in the second quarter of 2018. Switching to $6,000,000 or $0.71 per fully diluted share compared with $0.55 per share for the second quarter of 2018 and $0.54 per share in the third quarter of 2017. Q3 non GAAP net income was $47,300,000 or $1.06 were fully diluted share compared with $0.90 per share in the second quarter of 2018 and $0.84 per share in the third quarter of 2017. Fully diluted shares outstanding at the end of Q3 2018 were 44,700,000 Now let's look at the balance sheet. Cash, cash equivalents and investments were $353,100,000 at the end of the third quarter of 2018 compared to $318,700,000 at the end of the second quarter of 2018. For the quarter, MPS generated operating cash flow of about $52,200,000 compared with Q2 2018 operating cash flow of $25,400,000. 3rd quarter 2018 capital spending totaled $5,100,000, Accounts receivable ended the third quarter of 2018 at $59,900,000 or 34 days of sales outstanding. Compared with the $53,500,000 for 35 days reported at the end of the second quarter of 2018 and the $50,800,000 or 36 days reported in third quarter of 2017. Our internal inventories at the end of the third quarter of 2018 were $136,800,000, up from the $128,900,000 at the end of the second quarter of 2018. Days of inventory decreased to 175 days at the end of Q3 2018 from the 189 days at the end of the second quarter of 2018. Days of inventory are in our range days of inventory are in our new range, reflecting changing customer requirements, particularly in automotive and computing, and our new product introductions. Turning now to our outlook for the fourth quarter of 2018, We are forecasting Q4 revenue in the range of $151,000,000 to $157,000,000. We also expect the following: GAAP gross margin in the range of 55.2% to 56.2%. Non GAAP gross margin in the range of 55.6 percent to 56.6%. Total stock based compensation expense of $13,500,000 to $15,500,000 including approximately $500,000 would be charged to cost of goods sold. GAAP R and D and SG and A expenses between $50,600,000 and $55,600,000. Non GAAP R and D and SG and A expenses to be in the range of $37,600,000 to $40,600,000. This estimate excludes stock compensation and litigation expenses. Other income is expected to range from $1,000,000 shares to be in As expected, we continued to execute according to our plan of diversification in both products and geographical markets. We grew in Greenfield segments while gaining share in high value products in consumer and communication amongst the uncertainty in the market and geopolitical environment. You. Our first question comes from Matt Ramsay with Cowen. Your line is now open. Good afternoon guys and congratulations on a strong set of results with a lot of uncertainty out there. The question that we've been getting the most often is, there's a lot of new content growth and market share gains that are embedded into the long term forecast that investors have for your company across a number of businesses Maybe Michael, you could talk about it at a high level, how you're progressing there. And then just juxtapose that against a lot of concerns about a weaker macro environment Just I know that folks have an expectation of 20% growth for your company over the next couple of years and we're just trying to understand the risks associated with that versus the opportunities for Well, as you know, NPS, we're not in a position to answer what the macro positions And now we only heard from, from you guys. And we have a very small percentage of a market share, particularly in those greenfield market segments. Such as all those and data centers, and as well as the industrial, the industrial side. And we have a very little market segment those segments should be relatively immune to what the market condition is. And, we expect it to grow in, according to our plant. And, in the next The next few years, we're all set. One point to add to that is that we're continuing to be very aggressive as far as securing new design wins. And that as we said in our prepared comments that while there has been a downturn that's reflected most in our consumer business, we didn't lose market share. In fact, we continue to make gains. That commentary is really, really helpful. And I guess as a follow-up, I've spent a decent amount of time with my team digging in to the programmable aspect of Meniere Solutions as you sort of bring programmability into the portfolio. Michael, maybe you could talk a little bit about at a high level. What percentage of the products that you're shipping now and winning designs with? And then sub I guess second, winning designs with are programmable in nature today and how you might see that trend going forward and what that might mean for market share? Thank you. All right, okay. I, at this point, still have a single digit percentage of our total revenue. And we expect a quadruple in the next couple of years. And probably most likely in the 4, 5 years 100% of our our product will be programmable. Got it. That's really helpful. And I'll jump back in the queue, if you don't mind, but congratulations and well done. Cheers. Thank you. Our next question comes from Rick Schafer with Oppenheimer. Your line is now open. Yeah, thanks. I'll add my congratulations guys on a nice quarter. So maybe obviously auto and industrial up 50 each up 50% plus in the quarter I think the auto business is tracking to something north of $80,000,000 this year. Mostly it's been infotainment. I you're starting to see lighting and motor control start to ramp. Maybe you could walk us through what that next leg of growth there looks like. I know, Michael, you talk a lot about having 2 3 years of really solid visibility there. I'm curious, as ADAS and BMS wins ramp, kind of what, A, what the timeline looks there and then what we could see for a margin impact? I guess when would we start to see sort of a noticeable margin impact within that auto business? Even when I talk about infotainment, we still scratch the surface. We start to just start to periphering. And as we just went through the other business, the deep diving, the auto all those segments. And like we're just starting it or even in those, in the infotainment. And for next couple of years, and we have all these products of designing such as the lighting, including headlight And, and also, as Bernie said earlier, the body controls, like in models, in any kind of moving pieces in that in a car, we have an electronic control and we have those product designating in ADAS I see it in a 3 years out. And all these activities and we have to pick and choose which product we want to do. And we just don't have enough people. And our name is out, our product reputations out and we are proven to be a quality supply And so the margin will be staying same as now or even be higher. Got it. Thanks. And maybe switching gears to e Commerce. I know it's something that a lot of people care about with you guys. Maybe start with any customer feedback or what the feedback has been from customers so far? I know you've talked about adding 100 of customers there. I know you've also talked about, I believe, 1st revenues or material revenues sort of in 2020. I guess I'm curious, do smaller customers that e commerce would be targeting, I mean, do they need to go through a full qual like some of your more established larger customers? And I guess what I'm getting at is could we see revenues in e commerce kind of pull forward? Could we see those start to hit before 2020? Very possible, particularly those are smaller customers in the industrial shocks, they buy 10,000 to 20,000 units a year And those are the ones, okay, those are the customers. And if we have, if we prove to be quality supply and they will stay with us for years. And So those ones just starting now. And again, so in terms of, of how their feedback is so far, our website is still, is up. And is not, we still have a lot more to do and particularly under the e commerce market segments given how do we do digital marketing and we start to do this year and the early early next year, you will see some significant changes. In terms of our current feedback, so far, we handle them for our business and they download almost every one of them they're very happy. They want to see more into these type of products. And I can say every one of them and we have in recent months, we gain a a few more than a few 100 customers and most of them that are still one of these kind of a product. Okay. And have you seen any competitive response from some of the larger HPA guys? I think that these are, we address the very segment of the market in the We don't see any other players and they do a similar thing as as we do. Thank you. Our next question comes from Quinn Bolton with Needham. Your line is now open. Hi guys, congratulations again on the very steady execution. Michael Bernie, just wanted to sort of address, I guess, one of the biggest investor fears I hear is kind of order rates declining in China region. Can you give us any sense whether those order rates, which sounded like they started to decline late summer, whether that stabilized or are they still sort of on a downward trend? And maybe just address the sort of where you are in terms of starting backlog looking into the fourth quarter of 2018, I think the last few quarters you'd gotten in to the quarter with nearly 100% of plan in backlog. And then maybe a couple of product follow ups? Thanks. Sure. I think that you can see from the Q3 numbers that And again, the comments that we referenced that in the Greater China market that we did see a downturn in demand, particularly for consumer. And so as a result of that, we are sort of monitoring to see if that branches out into our other end markets or if there are any changes in ordering pattern, You referenced also our last three quarters as far as what our experience has been with backlog going into the quarter. And in fact, what we've seen in this quarter is that we've sort of returned to a more normalized level, where we're not at the accelerated pattern that we've been experiencing previously, but the is really again returned to a more normalized backlog for this time in the quarter. So it's something that we have to continue to monitor. And certainly as there are different developments, we have demonstrated the ability to respond to that But I think the thing that is most encouraging for us is that the targeted areas that we focused on, again, the automotive, the computing and storage and the industrial, where they have long ordering visibility that those remain very solid and that we're just seeing gains that are significantly better than market. Great. And then maybe, Michael, could you just address as we look into the end of 2018 2019. And so we'll be launching their Cascade Lake platform by the end of the year and then the new Whitley or Cooper Lake Platform maybe second half of twenty nineteen. I know Pearly was a big uptick for you in terms of server content. How do you feel you're positioned Cascade Lake and Whitley or Cooper Lake over the next 12 months? I think it's We I expected that I think that we grow just we don't expected to have anything different, again, and all the designing activity and all the new product we released. And we expect it as the same as the last couple of quarters. And, I think they even grow faster than most of the revenue is going to grow in the next 2019 all the way to 2022. So a steady sort of a steady ramp in server power management over that 2019 to 2022 timeframe? Yes, yes. And the other in a similar rate of the growth. No, I was going to say that what you were referencing is that Intel has been adjusting their product release schedule around a couple of different issues. And obviously that's something we need to adapt to. We don't see it as a negative to or an impediment to the growth that might referring to. I can list about a couple of plus or minus a couple of quarters. Yeah. And that's out of our, our, but our controls, but the direction of a growth and we covered not only from a traditional servers, all these new AR AR systems and a new type of a service we cover all of them. Great. Thank you. Thank you. Our next question comes from Ross Seymore with Deutsche Bank. Your line is now open. Hi guys. Just wanted to get into the inventory and the channel side and dovetail that in to the backlog question that was asked a bit ago here. While Bernie, you said that the backlog coverages were to normal. Over the course of this year, correct me if I'm wrong, but have you guys been shipping to the elevated backlog? Have you been controlling it in where does channel inventory stand today? Sure. So in, the reference that you're talking to is between Q1 and Q2 that we'd actually had a decline in terms of channel inventory in terms of days And as we look ahead here, both as far as how we finished Q3 and in Q4, A lot of the sales commitments that we have for both quarters our related commitments that were made upwards 4 to 6 months ago. And so we are continuing to deliver against that But with the amount of uncertainty that is in the market, the timing of when that gets strong from the channel, is a little bit changed. And so we went up a little bit in Q3 And I don't know. I don't have a forecast for how Q4 is looking whether it'll go up or down a little bit. But again, it's something that we have to continue to monitor. I guess similarly to that, as the backlog falls, the fear people have, for the whole market and companies like yourself, is the what goes from 100% coverage plus to something that's normal, then the next step is a further step down. I know you guys have a great next year? [SPEAKER UNIDENTIFIED COMPANY REPRESENTATIVE:] Yes, okay. The inventory is still here Mark. We we have a lot of growth in growth in the new market segments and it changes the pattern how we do inventory. In auto industrialsandtelecom Now the 5G networks, although the revenue is small, it's not too lengthy. And and also as well as the data centers and the cloud Computing, we we really need a lot of inventory to cover the ramp. And Regarding to all these traditional, high volume business and Those businesses can go in and out within a half years. And so we're not worried about the inventory. So we're basically prepared to be able to service the targeted markets. And we believe that as you look first half of 'nineteen that they are less impacted by the price sensitivities that might be occur as a result of the tariffs or geopolitical trade policies. And then as Michael just said that on the areas that are more affected we have the ability to course correct. And as we demonstrated in Q3, even within the quarter, to be able to achieve our revenue goals. Yes. So high inventory, again, it's my favorite now. So that's a high inventory in a company like MPS, we have to build the reputation. In regards to the condition we will ship, and we will ship our product and we are where the newcomers we have to have a record of a reliability as well as a continuation of a of a delivery would never have that kind of problems. Any one glitch that caused a lot more problems, a much bigger market cap hit then a few 1,000,000 more than a few days of inventory. Great. I guess this is my last question. As you guys look back to the last cycle in kind of late 2015 early 2016, It was barely a blip for MPS. You still in 2016, grew, I think, 16%, 17% year over year, way above the analog market as a whole. If you're just to compare and contrast the positioning of MPS today versus what it was looking like back 3 years ago, you just walk through some of the puts and takes as you see it? Sure. I think that obviously with all of the new product releases that we've had that really started to ramp beginning in the second half of twenty seventeen and now are in full swing, we have a much different portfolio that we're able to manage. And so from that regard, I think that the diversification, both in terms of products and markets and geographies, allows us an awful lot of flexibility that we didn't have back the second half of twenty fifteen. Having said that, I would hate to try and draw a parallel between 2015, which ended up being a rather short term and pretty much an issue specific to the semiconductor industry and what we're observing today. And I don't think that people have enough visibility or confidence as to how long this current environment might last. Great. Congrats guys. Thank you. Thank you. Thank you. Our next question comes from William Stein with SunTrust Your line is now open. Great. Thanks for taking my question. I just want to make sure I understand sort of the narrative around end markets and demand trends. So consumer came in light as customers backed off orders in that end market that you think is to tariffs, but you made up more than the difference in the comps end market. I want to make sure I have that right and also understand better about what drove that upside in comps. Is that something that perhaps if the consumer end market would have been fine that you would have posted meaningful upside to the quarter? Or was this something that sort of came and surprised you to the upside? Or was there a lot of extra work that took to to drive this to allow you to deliver good results as you usually do. Helping me understand that would be great. Thank you. Thanks, Will. So there's a couple of observations. If you look at consumer sequentially from Q2 to Q3. This was a lower increase than we historically experienced. And it was fairly broad based as far as the number of areas that were impacted, interestingly, that that's a traditional consumer in or high value consumer end markets we actually performed pretty well. And then as far as the ability to course correct within a quarter, even with relatively short lead time, we play opportunistically in a lot of different markets And historically, we have not taken on the comms business. This is our referring to our legacy gateway and router business, because it tends to be lower margin and in this quarter, we were able to really just pivot. So it was not a lot of effort in order to be able to accept opportunities that we have an opportunity to quote on and bring that in within the quarter. So, it's, as I look ahead, I think the most encouraging thing is that we can have that opportunity. We see the comms business is actually lining up in very good shape for Q4 But I think one of the most encouraging things that might have been a slight upside of surprise is that we started to see some very initial sales on the 5G side. Yes, the comp business, okay. Yes, the comp business is in the last a few quarters, we are flat or slightly down. And, so, they have a refresh, okay, and then we gain some market market shares. And, but there's a significant portion of it. We see the 5G network and start to ramp. And those products we designed it in a couple of years ago. A follow-up if I can. When people ask about what's perhaps something that investors don't understand about monolithic. One of the answers I've heard you give is that, well, consensus for next year is up 16 and we think long term growth is at 20 would you still endorse a 2020 growth number for 2019 or would you think that's too optimistic given the geopolitical and other risks? I think it's a if you we will clearly beat whatever your forecast is for the next year industrial growth Zucker, will it be to buy 15 points or higher? I think that when we look next year as far as our confidence in 20 percent, that remains very consistent and solid. Again, We one of the things that we want to be known for is our consistency of execution. And that we can support that again with the amount of visibility we have particularly in these targeted areas that have the longer design cycles and longer ordering patterns. Now having said that, we're not immune to the macro. And certainly in the first half of the year, we feel reasonably confident that we have the shots on goal to be successful We don't have clear visibility on how that's going to play out in the early stages of the year. Okay. Thanks. Thank you. Our next question comes from Tore Svanberg with Stifel. Your line is now open. Yes, thank you and congratulations on the record operating margin. A few questions here. So, first of all, I know you have some, operations in China and certainly your supply chain is there. Any changes to that strategy at all? I mean, I know it's really early days, right? But just given some of the macro turmoil, any changes to the thinking at all about your operations in China at this point? We need a diversified and we have a lot of resources in the China. It but we started it 2 years ago. We started diversified it in a different political region. In terms of R And D, mostly all the development jobs. And All these other geopolitical issues that we thought of, our controls, if we see the one we down the region. And that's the area we really want to focus on and diversify our presence. Okay, very good. No, no, go ahead. Finish the the answer Yes. I was just going to say that on the supply chain issues right now, Michael is exactly right. We don't have controller visibility as far as what the next steps of the process. But again, to the extent that we diversify in the end markets that we sell into, and the different customers we have, we would probably adapt to similar profile longer term for our supply chain as well. That's very fair. And a question on 5G, so you're starting to see some revenue contribution there. Is that power management that's based on IntelliFase or QS Mod just like in the data center market or are these different types of power products? And other types of a product in a different network segment. And as well as what you said, these are based on the IntelliSpace. And those products in the high power computing segment of 5G. Okay, very good. And I think you may have already answered this question, Michael, but As far as your lead times, since you obviously are so focused on making sure that deliveries are there, I assume your lead times are still very stable. They were stable first half. They're stable now? Yes. The lead time is a very, very stable Bernie can add on, okay? Yes. We've had no change in lead times, in all phases of production, whether it's a wafer packaging test, everything is going very consistently. Okay, very good. Just one last question. You generated almost 50,000,000 free cash flow this quarter. I mean, I know sort of your approach to capital management, but just kind of based on where the stock price is, any thought about how to put that free cash flow to use? Well, you're going to increase the dividend all looking for some attacking technology company online. So we are not going to buy another company for for revenue increase. Sounds good. Congratulations again on all the record results this quarter. Thank you. Our next question comes from Alessandra Vecchi with William Blair. Your line is now open. Hi guys. Congratulations on a great quarter. Thanks, Alex. Just to go in a little bit more on the consumer side and the weakness you've been seeing there. I think historically, you guys have said that of your consumer revenue, about 50% of its traditional, I think 30% of high value and 20% of its gaming. Are you seeing the weakness in gaming as well or is it only in that 50% traditional bucket And if it's in the traditional bucket, is it, should we consider the whole 50% week or is it only parts of that? Just sort of trying to quantify where consumer could go from here given that seems to be the one bucket that's the most at risk in the short term? Yes. I hate to say that when the last couple of times that we talked about gaming, our customers not happy And one time I said it wasn't my favorite topic sucking and our customer heard that too. So maybe it's my sense. There's a lot of money accumulated with 100% of the support. But here is that, for that regard and we see high volumes and we're not talking about what kind of gaming is like a and we see a bit softness and it needs a high volume ones. And other than that, and we see the connected device or the IoT, if you will, Duncan, and the variety of other cages and we see in our designing or we see the market demand is still very similar. And then similarly, just in terms of the Q4, you guys traditionally don't don't give us any sort of granularity on the directional segment or the direction of the different segments. But if you had to save on the segment from Q4, what's strongest to weakest? Should we still be thinking about computing and storage is the strongest? And then maybe industrial and optical? Or how has that shifted? Yes. Again, I think if you look at, the results clearly, what we saw in Computing Storage Automotive Industrial Those weren't one time drivers. This is all about the secular expansion that we've been discussing now for several years and we're now seeing the results come in full term. And so, I don't see anything in my, in the outlook. That would indicate a diminution of those growth rates. And then as far as how we manage the margin with the consumer something that we're adept at being able to do. So I think that as we look at Q4, We feel very confident not just in the number in total, but also the individual markets as far as that are going to source that growth. Thanks Alex. Thank you. Our next question comes from Chris Caso with Raymond James. Your line is now open. Yes, thank you. Just first question with regard to inventory levels, can you talk about what your visibility is both to the distribution channel and to OEM inventories. And I know, that through the year, you guys have been taking steps to try to discourage customers, prevent customers from building excess inventory, could you speak to some of those actions and your level of visibility and confidence in the inventory levels? Yes, that's my favorite question. And uh-uh inventory, I tried to convince you all of you guys that it's good for us to to increase. And now I think we're pretty normal. And then as far as inventory in the channels, Again, I just referred to an earlier response is that in the prior three quarters, we had experienced a pattern of overordering and this was reflected in higher than normal historic backbone levels at certain points in the quarter. And while we've seen a moderation of that, that is changed because there is a certain level of uncertainty. And we want to make sure that we're really satisfying real demand as opposed to creating a problem for us down the road. And having said that, with the channel, and we did a very thorough assessment of it at the end of Q3 as well as what we've expect to be the sell through in Q4 and that all got taken into account as we gave our guidance for Q4 in total. So, right now, we're feeling that we're getting timely feedback and we're managing it accordingly. All right, great. And I guess, just following on from that, could you talk about what you consider to be normal seasonal patterns in Q1? And, I know there's not visibility right now, and I think you're probably doing a lot of work on that. But are there any aspects that we should take into consideration with regard to Q1 based on what you're seeing right now? Yes. We only provide guidance 1 quarter ahead And so I don't want to overreach with any comment, but if you traditionally look at with the exception of last year, which was an unusual set of circumstances because we had greenfield opportunities, particularly in the computing storage that were introduced that we've traditionally had a step down from Q4 to Q1 of between 3% to 4%. Got it. Okay. Thank And we do have a follow-up from Quinn Bolton with Needham. Your line is now open. Is a question, but just I guess wanted to ask specifically, as you look into your distribution channels, I think there's especially in certain environments, a tendency for the distributors to reduce their inventories into calendar year end And so I'm guess when you look at your 4th quarter forecast, you said you took into account sort of the supply chain and the disty channel, are you expecting them to reduce their days of inventory in the fourth quarter? Or do you expect them to sort of keep a constant days inventory on hand? Any guidance you could provide us would be helpful. Yes, the formula sort of works that the channel tries to reduce the dollar value of inventory the quarterly revenue in Q4 is less than Q3. So my expectation is that the dollars will be at or below the Q3 level and the days may be at or maybe even a little above in Q4 and it's really a arithmetic exercise rather than anything that we're concerned about. Thank you. Thank you. I show no further questions in queue. So I'd like to turn the conference back over to Bernie Blagen for closing remarks. Thank you. I'd like to thank you all for joining us for this conference call. I look forward to talking to you again in our fourth quarter conference call, which will likely be in February. Thank you, and have a nice day. Thank you. Ladies and gentlemen, that does conclude today's conference. Thank you very much for your participation. You may all disconnect. Have a wonderful day.