Good day, ladies and gentlemen, and welcome to the Monolithic Power Systems, Inc. Q1 2018 earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session and instructions will follow at that time. If anyone should require assistance during the conference, please press star then zero on your touchtone telephone. As a reminder, this conference is being recorded. I would now like to introduce your host for today's conference, Bernie Blegen, Chief Financial Officer. You may begin.
Great. Thank you. Good afternoon, and welcome to the first quarter 2018 Monolithic Power Systems conference call. Michael Hsing, CEO and Founder of MPS, is with me on today's 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 statements contained in the Q1 earnings release and in our SEC filings, including our Form 10-K filed on March 1st, 2018, which is accessible through our website, www.monolithicpower.com. MPS assumes no obligation to update the information provided on today's call.
We will be discussing gross margin, operating expense, R&D and SG&A expense, operating income, interest and other income, net income, and earnings on both a GAAP and a non-GAAP basis. These non-GAAP financial measures are not prepared in accordance with GAAP and should not be considered as a substitute for or superior to measures of financial performance prepared in accordance with GAAP. A table that outlines the reconciliation between the non-GAAP financial measures to GAAP financial measures is included in our earnings release, which we have filed with the SEC. I would refer investors to the Q1 2017, Q4 2017, and Q1 2018 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 had yet another record first quarter, with revenue of $129.2 million, 28.7% higher than the comparable quarter in 2017. MPS continues to benefit from our technology leadership and diversified multi-market strategy. Looking at our revenue by market, compared with the first quarter of 2017, revenue from consumer markets increased $11.5 million or 32.4%. The year-over-year revenue increase reflected solid improvements in high-value consumer markets, including home appliances, power chargers, and lighting, as well as increases in certain traditional consumer revenue categories. Consumer revenue of $47.1 million represented 36.5% of our Q1 revenue.
In our computing and storage market, revenue of $31.0 million increased $10.4 million or 50.2% year-over-year, reflecting strong sales growth for cloud computing, SSD storage, and high-end notebooks. Computing and storage revenue represented 24.0% of MPS' first quarter 2018 revenue. First quarter 2018 automotive revenue of $17.7 million grew 43.8% over the same period of 2017. This growth primarily represented increased sales of infotainment, safety, and connectivity application products. Automotive revenue represented 13.7% of MPS' first quarter 2018 revenue. First quarter 2018 industrial revenue of $17.6 million increased 14.3% from the first quarter of 2017, reflecting gains in smart meters, security, and power sources. Industrial revenue accounted for 13.6% of our total first quarter revenue. In Q1, MPS adopted the revenue recognition standard generally referred to as Topic 606. Its adoption had a negligible impact on Q1 revenue.
GAAP gross margin was 55.4%, 40 basis points higher than the fourth quarter of 2017 and 80 basis points higher than the first quarter of 2017. Our GAAP operating income was $22.0 million, compared to $13.6 million reported in the first quarter of 2017. For the first quarter of 2018, non-GAAP gross margin was 55.9%, 20 basis points higher than the fourth quarter of 2017 and 40 basis points higher than the first quarter of 2017. Our non-GAAP operating income was $37.2 million, compared to $26.5 million reported in the first quarter of 2017. Let's review our operating expenses. Our GAAP operating expenses were $49.5 million in the first quarter of 2018, compared with $41.3 million in the first quarter of 2017. Our non-GAAP first quarter 2018 operating expenses were $35.0 million, up from the $29.2 million reported in the first quarter of 2017.
The differences 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 first quarter of 2018, total stock compensation expense, including approximately $433,000 charged to cost of goods sold, was $15.0 million, compared with $11.7 million recorded in the first quarter of 2017. Switching to the bottom line, first quarter 2018 GAAP net income was $21.9 million, or $0.49 per fully diluted share, compared with $0.33 per share in the first quarter of 2017. First quarter 2018 non-GAAP net income was $35.0 million, or $0.79 per fully diluted share, compared with $0.58 per share in the first quarter of 2017. Fully diluted shares outstanding at the end of Q1 2018 were 44.3 million. Now let's look at the balance sheet.
Cash, cash equivalents, and investments were $312.5 million at the end of the first quarter of 2018, compared to $304.3 million at the end of the fourth quarter of 2017. For the quarter, MPS generated operating cash flow of about $16.3 million, compared with operating cash flow of $21.9 million in the first quarter of 2017. First quarter 2018 capital spending totaled $7.4 million. Accounts receivable ended the first quarter of 2018 at $48.2 million, or 34 days of sales outstanding, which was one day lower than the 35 days posted in the first quarter of 2017. Our internal inventories at the end of the first quarter of 2018 were $111.9 million, up from the $99.3 million at the end of the fourth quarter of 2017. Inventories increased in anticipation of sales growth during the second half of 2018, especially for the computing, consumer, and automotive markets.
Days of inventory increased to 177 days at the end of Q1 2018, compared with 157 days at the end of the first quarter of 2017. I would now like to turn to our outlook for the second quarter of 2018. We are forecasting Q2 revenue in the range of $135 million-$141 million. We also expect the following: GAAP gross margin in the range of 54.9%-55.9%. Non-GAAP gross margin in the range of 55.4%-56.4%. Total stock-based compensation expense of $15.2 million-$17.2 million, including approximately $500,000 that would be charged to cost of goods sold. Litigation expenses ranging between $300,000 and $500,000. GAAP, R&D, and SG&A expenses between $48.4 million and $53.4 million. Non-GAAP, R&D, and SG&A expenses to be in the range of $33.7 million-$36.7 million. This estimate excludes stock compensation and litigation expenses.
Interest in other income is expected to range from $600,000-$700,000 before foreign exchange gains or losses. Fully diluted shares to be in the range of 43.9 million-44.9 million shares. In conclusion, we continue to grow and continue to enhance shareholder value. I will now open the phone lines for questions.
Ladies and gentlemen, at this time, if you have a question, please press the star, then the number one key on your touchtone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. To prevent any background noise, we ask that you please place your line on mute once your question has been stated. Our first question is from Quinn Bolton from Needham. Your line is now open.
Hi, guys. Nice results. Michael and Bernie, wanted to start with the power management business, specifically for the Purley cycle. Can you give us an update on when the QSMod solutions for CPU power begin to ramp? Does that start this quarter?
I think we see it starting the last couple of quarters and just slowly, all these activity. Yes, now we see a lot more. I think that in addition to Purley, we've certainly increased the number of design wins that we have on this cycle with some of our other products, the point of load and the eFuse. As we look ahead, we see a continuing momentum growth.
You guys still think you're on track to pick up those four to five points of share that you had previously talked about?
Well, we only talk about results for the next quarter of forecast. We don't see anything that's changing that assumption.
Okay.
This is very beginning, early for MPS. All the opportunities Developing.
Okay. The second question is just kind of, it looks like your inventories are up in anticipation of sort of higher second half sales, but I think the last couple of quarters you've said that things in the supply chain are tight. You were worried about double ordering. I think that was particularly something that you were worried about heading into the fourth quarter. Can you just give us an update on your backlog coverage? Have you been able to sort of shake out any potential excess from the order books?
Yeah, I think that it's prudent to be cautious as far as interpreting the ordering trends that we're seeing. In each of the last three quarters, the bookings and backlog going into the quarter have been running higher than they traditionally have. As a result of that, we've wanted to, A, be able to make sure that we have adequate inventory in order to be able to meet real demand. By the same token, we're trying to manage what we observe as far as inventory in the channel to make sure that that doesn't increase and come at the expense of future growth. When we looked at the channel inventory at the end of Q1, it was very consistent. In fact, it was down a few days from where we'd been a year ago.
Great. Thank you.
Thank you. Our next question is from Rick Schafer from Oppenheimer. Your line is now open.
Thanks. Excuse me, congrats on another nice quarter, guys. Your auto business, maybe my first question, your auto business has been doubling annually, I guess, the last few years. I think it was up close to 50%, I think you highlighted, Bernie, in your remarks this past quarter. Can you talk about the growth expectation for 2018 as much color as you can give there and maybe provide some color on what's driving that growth? I mean, it seems like ADAS is becoming a bigger incremental driver. As mix kind of maybe favors ADAS going forward, can you talk about what that does to maybe gross margin in that segment?
Sure. When we look at automotive right now, we are certainly benefiting from significant growth, still we represent such a small portion of what the total available market is to us. A lot of what we're seeing right now has been in the gains in infotainment, we've also seen some gains in body controls and also in certain of the networking applications. We look forward to opportunities in ADAS in particular, although I don't think that those will be of a material nature to us until for another couple of years.
Got it. Thanks. Second question. The 12 volt to 48 volt transition that's sort of already underway in auto, can you talk about that opportunity as it relates to GPU and CPU core power? Is that something else that we should think about as being sort of couple years from now before it's really a growth driver and who do you expect to compete with there? Who do you see also going after the 48 volt market for CPU, GPU?
I think a 48 volts market is inevitable as CPU or GPU power increases, that's the only way to get the current down, to get the efficiency up. Things that it's all well known that our competitors and that they are publishing papers, we have solutions now.
Michael, any key competitors you see there? I mean, would it be the sort of the TIs and the Infineon of the world, or who would it be, do you think at 48 volt?
We don't have a real solution out there other than existing 48 volts, and 48 volts, which is very expensive as far as I know. I think we are the first few companies or first companies that have our own solution as a semiconductor players.
Got it. Then if I could sneak one last question in, just maybe a quick update on your 300 millimeter design efforts, and I don't know how to frame that. I mean, any expectation or what your expectations are for 300 millimeter revenue contribution this year? Or is it more of a, I know I'm asking a lot of far-out questions. I mean, or is this more of a 2019, 2020 kind of thing?
I think it's a 2019, 2020 kind of thing. I don't rule out at the end of the year we have some small volume productions happening.
Michael, is it targeting any particular, like specific verticals or is it just kind of across your basket of verticals?
I think it's across a basket of verticals now. With the 12 inch and we integrate a lot more features in there and as we talk about a lot of programming capability, a lot of memories and along with the increase of a power density. I think we'll be putting a power solution on, as MPS's name, it's a Monolithic Power Systems. We're going to put a soft power systems on a single chip. 12 inch is just widen our capability
Got it. Thanks, guys.
Thank you. Our next question is from William Stein, from SunTrust. Your line is now open.
Great. Thanks. I'd like to sort of contrast the growth rate in light of your inventory build in the quarter. You've been a rapid growth company for some time. You've accelerated the year-over-year growth in the last couple quarters now, which is great, and inventories are increasing. Should we expect that acceleration to continue and to see even higher year-over-year growth rates as we progress through the year? That's what the inventory build would imply. If not, I'm hoping maybe we can reconcile it a little bit. Thank you.
Yeah, that's a good reading. Of course, we're not saying that we're going to accelerate more, we are certainly anticipating that, if there's opportunity there.
For investors that sort of look at this outsized growth rate and recognize it's pretty unusual, pretty unique in semis, can you help us maybe review the reasons that you're seeing the design wins, maybe from a technology perspective or just from the design wins that you've won recently that you can talk about that would exemplify why you're seeing such rapid growth?
Well, if we're talking about all the design wins, we can go for hours. Frankly, I don't even know. I can remember three or four things. This is truly a broad-based growth. We're not using our standard product and using our configurable software. We can go into many different fields. That's actually reality. That's the beauty of it. I can't say which one has more growth. Now you're talking about server, talking about autos, and these are very high concentrated market segments that we can talk about. A lot of others actually grow more than these areas. I can't really talk about it. In fact, a lot of smaller customers using our solution, that really excites me. That means we're pushing the margin even higher, and we provide the service. Our customers really want that, even though we have outrageous margins.
That's the kind of things I'm getting excited.
Great. Thanks very much. Congrats on a great quarter.
Thanks.
Thank you. Our next question is from Ross Seymore from Deutsche Bank. Your line is now open.
Hi, guys. Congrats on the quarter and guide. On the comments you said earlier, Bernie, about the inventory up because you saw opportunities in the second half, I think you said in computing, consumer, and automotive. Without going into specific customers and sockets, et cetera, can you just talk a little bit about the applications into which you're putting those parts in the back half of the year and just what sort of dollar content penetration, market penetration, just some numbers around those to give us a little more color to help investors feel comfortable with the inventory level?
Sure. When we look at a lot of the growth that we started to enjoy probably beginning in Q3 of 2017, we were basically introducing new products and new markets for new customers. The demands of these customers are significant, meaning that we didn't want to come out of the gate with our new product releases and not be able to sustain the growth because of being constrained in any way. I think you'll recall that last year we invested in bringing up a fourth fab in order to aid capacity. Really this has been pretty consistent as far as an overarching supply chain management philosophy to position us to be able to achieve, as Michael said, should the demand be there, this accelerated rate of revenue growth. We believe that we have actually targeted.
When we look at the inventory levels, they're targeted in some of the highest growth revenue areas. Right now it's also in the quarter pretty well evenly split between raw materials, work in process, and finished goods, meaning that what we've done is have a very balanced approach to how we're making those investments.
Yeah, Ross, you don't have to worry about these inventories. We increase it, I know some of the investors are kind of sensitive. I'm kind of irritated. We grow this much, we need real inventory to back it up. On top of it, all these products are new product. If anything goes wrong, we have something to back it up. Also provides with some industrial automotive, even computing company. They want inventory, they want to, okay, we are the new players, and we guarantee they are supplied. That's why we're doing it. Last reason is I don't worry about inventory. Our product cycles last for 10 years, and we don't have problems until I have a huge write-off.
That is very helpful. My second question, I'm going to try not to irritate you further, if that one happened to, this one might do worse. On an absolute dollar basis, the guidance is great. On year-over-year, the guidance is great. Sequentially, though, that's less growth than you guys. I have to go back many years. Is there anything that's changing in the very near term, the bridge between now and the second half growth that's less than normal? Is there something that's changed just with the move to ASC 606 as far as the seasonality? Just trying to figure out, or are you just being conservative like you tend to do over time for consistency benefits. Just trying to figure out what went into the guidance in those regards.
Sure. I can help out with this. If you look at, generally speaking, we have a fairly large or pronounced falloff in revenue between Q4 to Q1, that didn't occur. The base that we're starting out with in Q1 revenue, is much higher than the seasonal norm would normally provide for. Some of that represented that we had some late deliveries in Q1, that aided our performance in the quarter, also creates an issue with the comparable Q2 number. I would say that we do have a profile to always be able to meet expectations and, in fact, do a little bit better. There is a change in seasonality relative to what our historic norm has been with Q1. None of that is related in any way to the Topic 606, the new revenue recognition standard.
Well, I think, Ross, you covered us since the IPO, right?
Yeah.
You see the seasonality change, we from a consumer-centric to broad-based now. Last year, we see 4 quarters consecutive growth. That's the first time, I think the first time ever.
2006.
2006. That was the last time. This is the second time. I think this time is really changed from all the business change. That's a less literal question.
Well, I'm glad I didn't annoy you too terribly, Michael. Congrats again, guys.
Thank you.
Thank you. Our next question is from Tore Svanberg from Stifel. Your line is now open.
Yes. Thank you, and congratulations on the consistency. First question, could you update us on e-commerce and your programmable products, or is that business model starting to contribute to revenue yet, or is that still more of a second half event?
Well, I think our whole e-commerce website is up. I think that's only the first step. Regarding to revenue, no. Okay. The business model, the more I visit customers, these are smaller customers, and the more I'm really excited. I think that this is, we were hitting an inflection point in sometimes, this year or next year as we provide more content. What can we put on the website? How we serve to all these very quick time to market product or underserved customers. The business models, I truly really believe are more, I believe when I visit those smaller customers. I see a lot more opportunity. Now we have delivered more content. We have the website, but although the programming portion still not there yet.
As I talk about it, we hand them a floppy disk, and they can program on their own now.
That's really helpful. On that same topic, as that business model starts to materialize, wouldn't that mean that inventory days will be higher anyway, just because these are programmable parts?
I haven't really thought about this one. The problem will be because, we have a third-party product, and as our part of our solutions. That probably will be a higher inventory in the futures.
Okay.
Tore, part of the benefit of being able to go to the 12-inch wafer, is that we can have larger production runs and get better cost economics, that certainly benefit this mass customization market.
Okay, great. I had a follow-up question on the 48 volts. Are you using the BCD HV process for that, or is it something else?
No, that's correct. We have a very efficient solutions, and I think as a lot of people seen it, and we're presenting papers. We have a real product now. Okay. This product family is very cost effective, and I think as a 48 volts, we're really betting on it. That's our futures.
Okay, very good. Just one last question. I know there's been some talks in the industry about shortages, especially for raw wafers. Is that something that you're seeing and have you secured enough capacity there for your growth going forward?
We don't have a shortage. Last year, we expand fab, and this year, we expand fab again. We don't see shortages, okay? We have a lot of inventories, and we don't have a shortage issues. To other ones, I heard a lot of stories, okay, out there. I can't confirm.
Sounds good.
Yeah.
Sounds good. Congratulations again. Thank you.
Okay. Thank you, Tore.
Thank you. Our next question is from Chris Caso, from Raymond James. Your line is now open.
Yes, thank you. Good evening. Just another question, following on to the seasonality question. Is there anything in particular we should be thinking about seasonality with respect to individual segments embedded in the Q2 guidance, with automotive and computing carrying much of the sequential growth in Q1? Does that continue into Q2, or do you see a bit more broad-based revenue growth as you go into Q2?
What I believe. These are designing activities, and designing activities turning into a revenue takes about three or four years. We see all these activities, and we see all these activity turning into our revenues. I think from now on, we will have a very consistent growth, and that's really what we want to see it, and a steady state. Maybe steady state have a bad connotation. Somebody got picked up, okay, we are slowing down. We're not. Okay. I think consistent is the key. For next couple of quarters, we don't see much of a difference from last year, I guess. Yeah.
No, one of the things that we work to do is, even though we're in a high growth relative to our industry, is we want to be predictable. I don't think there's anything boring about that.
Right. Well, as a follow-on to that, given what appears to be strong industry conditions, strong revenue for you guys, to what extent are you able to be somewhat selective in the business that you take from a quarter-to-quarter basis? I'm sure that there's some margin discrepancies among some of the things that you sell. Given the business conditions right now, are you able to be a little bit more selective in that business? If so, what does that mean?
One of the things that we've benefited from is we've seen this shift in our business mix is that there's longer lead times. As a result of that, we're able to have very consistent 10-20 basis points improvement in our gross margin quarter-over-quarter. What that allows us to do is find the mix that allows us to accelerate our rate of revenue growth. It's really having that visibility and that lead time that allows us to be able to manage the business, in this manner.
That's great. One quick follow-on. In computing, Intel made some changes to the roadmap on 10 nanometer, pushing some of that out. I know that you guys have had some design wins on that. Is there any material effect on your business going forward?
No. We keep an eye on what Intel is doing, but as far as a delay in a release or a change in their roadmap, it is not going to impact us.
Great. Thank you.
Thank you.
Thank you. As a reminder, ladies and gentlemen, if you have a question, please press the star, then the number 1 key on your touchtone telephone. Our next question is from David Wong from Wells Fargo. Your line is now open.
Thanks very much. Michael, can you run through some of the R&D projects currently underway that you're most excited about?
It's eMotion. I just visit a couple of customers, these really need our help, they were glad to see us, okay? These are from What do you call it? The mail, the packaging sorter to warehouse management, to massage chairs to hospital bed. They have a different kind of a design, that each design take them half year, or three months to half year. We can go in there with our standard modules. Sometimes they want to buy our power modules, we buy from a third party. We produce several standard product, we use programs to change it. These are significantly change our business. We sell instead of a few dollars a chip, now we sell $20, $30 module now. Our customers or those customers really want this product, so they not have to go through a design.
That's kind of thing get me excited.
I think just to add to that, sort of two things that all of our R&D is focused on right now is really the ease of use and that we're really focused on selling our customers solutions as opposed to just an individual IC.
Okay, great. One thing just to confirm, Bernie, I think last earnings call, you said that adoption of ASC 606 has negligible revenue recognition impact on Q1 revenues, and that's still true going into the next quarter. Is that correct?
That is correct.
We did a sell to model, right? We never have a sell through model.
Yeah. Our business, we had a very small portion of it that was on sell through.
Since the inception of the company, we always do sell to models.
Correct.
You buy a product, you own it. We don't have.
Okay, excellent. Thanks very much.
Thank you.
Okay.
Thank you. Our next question is from William Stein from SunTrust. Your line is now open.
I was asked and answered. Thank you.
Thank you. At this time, I'm showing no further questions. I would like to turn the call back over to Bernie Blegen, Chief Financial Officer, for closing remarks.
I'd like to thank you all for joining us for this conference call. As a reminder, MPS will be hosting an Analyst Day on June seventh at our offices in San Jose, California. We expect this to be an informative update on MPS's strategic direction. I hope you will be able to join us. If you are unable to join us on June seventh, I look forward to talking to you again during our second quarter conference call, which is likely to be at the end of July. Thank you. Have a nice day.
Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may now disconnect.