Earnings Call: Q1 2021

May 4, 2021

Welcome everyone to the MPS First Quarter 2021 Earnings Webinar. Please note that this webinar is being recorded and will be archived for 1 year on our Investor Relations page at www.monolithicpower.com. My name is Genevieve, and I will be the moderator for this webinar. Joining me today are Michael Singh, CEO and Founder of MPS and Bernie Blagen, VP and CFO. In the course of today's conference call, we will be making 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 Q1 earnings release and in our SEC filings, including our Form 10 ks filed on March 1, 2021, which is accessible through our website. MPS assumes no obligation to update the information provided on today's call. We will be discussing gross margin, operating expense, R and D and SG and A expense, operating income, interest and other income, net income and earnings on 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 2020, q4 2020 and q1 2021 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. Now I would like to turn the call over to Bernie Blaken. Thanks, Genevieve. MPS posted record 1st quarter revenue of $254,500,000 53.5 percent higher than the Q1 of 2020. The year over year revenue increase represented strength in the overall market and more importantly, broad based market share gains resulting from customer acceptance of our new product introductions. 37% of our Q1 2021 revenue resulted from New products introduced in the last 3 years. New product acceptance on this scale has paved the way for accelerated growth. Looking at our revenue by market. Q1 2021 revenue from consumer markets of $66,200,000 increased $28,800,000 or 77.1 percent from the same period of 2020. The year over year revenue increase reflected A broad increase in overall demand along with the initial ramp revenue ramp from our new mobile device charging IC. Consumer revenue represented 26.0 percent of our Q1 revenue compared with 22.6% contribution in the Q1 of 2020. Q1 2021 automotive revenue of $44,900,000 grew 92.5 percent over the same period of 2020. This growth primarily reflected continuing sales growth for infotainment Safety and Connectivity application products and first time revenue from products introduced in the 2021 model year. Automotive revenue represented 17.6 percent of MPS' Q1 2021 revenue compared with 14.1% in the previous year. In our computing and storage market, 1st quarter 2021 revenue of $67,500,000 increased $15,500,000 were 29.9 percent year over year, due primarily to higher notebook and storage sales. Computing and storage revenue represented 26.5 percent of MPS' Q1 2021 revenue compared with 31.3% in the Q1 of 2020. Q1 2021 industrial revenue A $39,800,000 increased 57.7% from the Q1 of 2020 And accounted for 15.6 percent of our total Q1 revenue. The revenue increase Over the Q1 of 2020 primarily reflected broad based gains in all of our major product groups. Q1 of 2021 communications revenue of $36,100,000 rose $8,200,000 or 29 point 4% from the Q1 of 2020. The year over year increase primarily reflected higher networking and wireless gateway Home router sales. Communication revenue represented 14.2% of MPS' 1st quarter Expansion and diversification of our supply chain. Specifically, we executed ahead of market demand. 2, we accelerated the release of advanced products and solutions based on our leading edge technologies. 3, we've gained increased acceptance of our solutions with 1st tier customers globally. 4, we continue to diversify and support a wider number of end product applications. Moving now to a few comments on gross margin. GAAP gross margin was 55 0.4%, ten basis points higher than the Q4 of 2020 and 20 basis points higher than the Q1 of 2020. Our GAAP operating income was $46,100,000 compared with $40,000,000 reported in the Q4 of 2020. For the Q1 of 2021 non GAAP gross margin was 55.8%, 10 basis points better than the Q4 of 2020 and 30 basis points better than the Q1 of 2020. Our non GAAP Operating income was $75,800,000 compared to $66,300,000 reported in the Q4 of 2020. Let's review our operating expenses. Our GAAP operating expenses were $95,000,000 in the Q1 of 2021, compared with $88,900,000 in the Q4 of 2020. Our non GAAP Q1 2021 operating expenses were $6,200,000 up from the $63,600,000 reported in the Q4 of 2020. 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 Q1 of 2021, total stock compensation expense including approximately $816,000 charged to cost of goods sold was $28,600,000 compared with $23,000,000 recorded in the Q4 of 2020. Switching to the bottom line, Q1 2021 GAAP net income was $45,400,000 or $0.95 per fully diluted share compared with $42,900,000 or $0.90 per share in the Q4 of 2020. 1st quarter 2021 non GAAP net income was $69,500,000 or $1.46 per fully diluted share compared with $52,500,000 or $1.31 per fully diluted share in the Q4 of 2020. Fully diluted shares outstanding at the end of Q1 2021 were 47,700,000 Now let's look at the balance sheet. Cash, cash equivalents and investments were $641,600,000 at the end of the Q1 of 2021 compared to $598,000,000 at the end of the Q4 of 2020. For the quarter, MPS generated operating cash flow of about $77,100,000 compared with operating cash flow of 79.6 $1,000,000 in the Q4 of 2020. 1st quarter 2021 capital spending totaled $19,000,000 Accounts receivable ended the Q1 of 2021 at $84,100,000 or 30 days of Sales outstanding, up 4 days from 26 days at the end of the Q4 of 2020. Our internal inventories at the end of the first were $175,000,000 up from the $157,100,000 at the end of the Q4 of 2020. Days of inventory increased to 141 days at the end of Q1 2021 compared with 137 days at the end of Q4 of 2020. Historically, we've calculated days of inventory on hand as a function of the current quarter's revenue. We believe comparing current inventory levels with the following quarter's revenue provides a better economic match. On this basis, you can see days of inventory increased slightly to 128 days at the end of the Q1 of 2021 126 days at the end of the Q4 of 2020. I would now like to turn to our outlook for the Q2 of 2021. We are forecasting Q2 revenue in the range of $274,000,000 to $286,000,000 We also expect to follow: GAAP gross margin in the range of 55.1% to 55.7% Non GAAP gross margin in the range of 55.5% to 56.1%. GAAP R and D and SG and A expenses between $95,900,000 $99,900,000 Non GAAP R and D and SG and A expenses to be in the range of $65,500,000 to $67,500,000 This estimate excludes stock compensation and litigation expenses. Total stock based compensation expense of $31,400,000 to $33,400,000 including approximately $1,000,000 that would be charged to cost of goods sold. Litigation expenses ranging between $2,300,000 $2,700,000 Interest and other income is expected to range from 1 point 47,300,000 to 48,300,000 shares. In conclusion, we have paved the way to multibillion dollar revenue. I will now open the webinar for questions. Thank you, Bernie. Analyst, I would now like to begin our Q and A session. Our first question comes from Joshua Buchalter of Cowen. Joshua, your line is now open. Hey, Thanks for taking my question and congrats on another set of solid results. I was hoping you could elaborate on the inventory dynamics. You're one of the Few companies that invested proactively ahead of the supply issues across the industry, but we're still not near your 180 day and 200 day target. So Just wondering how you're thinking about balancing rebuilding the channel versus taking business as some of your peers can't serve and also your share gains? Thank you. Well, as we spend continue to expand our capacities, As we said it earlier in the as we said in the last quarters, and I think that will We expected it with the current rate of increase the capacity will be end of the year Or early next year's, we will achieve that type of inventory, so if the demand is not continued to increase this much. And I think it's notable, Josh, that we did increase both in terms of dollars and days, The amount of inventory we had from Q4 to Q1, which rounds counter to the capacity constraints that some peer companies are experiencing. Got it. Thank you. That makes sense. And any more granularity you can provide in the guidance by end market for next quarter, any of the buckets moving But you're really more than the others? Thanks and congrats again. Yes, I would probably look to computing Where there was a couple quarter gap in data center that data center Should begin to take off again. I think automotive appears to be continuing to grow nicely both in terms of year over year performance and sequentially. And also we're seeing that same continuation In consumer. Our next question comes from Ross Seymore of Deutsche Bank. Ross, your line is now open. Hey, guys. Thanks for letting me ask a question. I wanted to talk about the sustainability of demand. Recently in this earnings season, a lot of semi stocks Sold off on really good numbers and it clearly looks like the market is worried about double ordering those sorts of peak cyclical activities. Can you talk a little bit about how your visibility has changed, if at all, over the last quarter from the demand side of the equation? And any kind of general puts and takes about how you view Second half of the year, I know you're only guiding for 2Q, but any sort of company specifics or general trends that you'd like to highlight the second half of the year would be helpful. Yes. Okay. And of course, we're concerning double orders, Okay. I mean, in the past, we said that we have a rigorous procedures to prevent that, okay? And we partial we're practicing partial shipments in the last 6 quarters. And we make sure our customers have a very minimal on hand inventories. And at the same time, we're not preventing their lying down, okay, their production lying down. So go back to your questions, what's the demand, Sonoke. We believe a lot of our demand is sustainable. The reason we said that, Bernie said earlier in the script that For us, these are greenfield market, greenfield product line. We start to grow. And as Bernie said, 37% of our products, we grow all from new products that we released For my last 3 years. And there is no reason to believe Next 2 years and next years, I'm not even talking about next 6 months. I'm talking about next couple of years. These products will continue to grow. And at the same time, and with the product that we released in the last 2 years, That will continue to turn into revenues in the 12 months later. So we believe our growth is sustainable. Thanks, Michael. I guess for my follow-up, a little more On one of your segments, the communications area has been very, very volatile. I know there's bans on different customers that can ship at different points in times. But Can you talk a little bit about what's driving the sequential growth that was up so much in the Q1, admittedly off of a weaker 4th quarter? And then As this year progresses, how do you see that market specifically more of the 5 gs side of things rather than the networking and gateway sides? We see as a matter of fact, my CEO talked to we have a communication committee Acaciaing meetings with top tiers and non Chinese 5 gs makers. And That market segment will picking up and will believe, okay, They believe this year and the next year, they're on the delinquency too. We believe we're very well positioned just as Michael said there, because the reach Customers that we're addressing the 5 gs solutions is very broad. So we think that As the market gains momentum, we're very well positioned to take full advantage of it. Great. Thanks, guys, and congrats again. Thank you. Thank you. Our next question comes from Tore Svanberg of Stifel. Tore, your line is now open. Yes. Thank you. Michael and Bernie, congrats again on a very strong quarter. First question, I was hoping you could talk a little bit about your share gains, Especially during times when capacity is really tight. So your solutions tend to be more integrated, especially versus discretes. And a lot of those discretes are in shortage. So I'm just wondering if you are seeing an acceleration in your share gains during this very tight semiconductor environment? Well, it's a if examples and I can give you Couple of examples a couple of scenarios, okay. If we're in a dual sources, okay, and Our competitors are using our customers are using dual source Or Triple Source. If and ours tend to be a lot more a fewer component than our competitor. And that is one interpretation why the demands and we're gaining so much demand. And another scenario is for the futures and we gained a lot of market shares because Just recently, because for those new product their new project, The shippings, they were putting up production for next 6 to 12 months. And we have a lot of design wins lately. Great. And as my follow-up, and you talked about the Contribution from the new products, I know you're not going to give us specific information on pricing, but is it fair to Say that the ASPs now of those new products are considerably higher than perhaps the last year or 2? Yes. For the gross margins, we stay on our course and we're not looking for a price hiking price Hi, exactly. I mean, and that's probably is not sustainable. So like I think our projects are models and And going the same trend as before. And, Roni? Yes. And just to add to that, Yes, certainly the new products that we're introducing and particularly those that are more heavily integrated, the mix of business does favor Higher ASP for those new products. Yes, that's what I thought. Okay, thank you. Congrats again. Thank you. Thank you. Our next question comes from William Stein of Truist. William, your line is now open. Great. Thanks for taking my questions. Ernie, you I think it was you in the opening remarks you said something about paved the way for accelerated growth. We all know monolithic has done Pretty amazing job with regard to growth relative to the industry, but should we interpret that as meaning perhaps We stay above 20% for a more protracted period of time? I think that's what we see announced. And And we'll wait to announce and I can make in a year 2 years ago, so like we only grow like 8%, Again, in the last year, 30 somethings and this year so far sort of we're in a very High percentage. And so we're looking at this kind of rate will it will continue. Yes, I think that's the message that we've tried to say in the formal comments and Michael added to That if you look at the reason for our growth, both last year and this year, It has much more to do with market share gains and new products and having developed our supply chain Then it does necessarily rely upon just the broader market. And so certainly in 2019, we had high expectations and we were not immune to downturns in the market. But I think that if we have a more normalized demand That we can perpetuate this accelerated rate of revenue growth, perhaps in excess of the 20% mark. And then along these lines, I think a couple of other questions might have even alluded to it with regard to higher ASP. I think a big driver of that is your transition to selling more of these modules, those types of more complex Integrated Solutions. Is that the case? And I'm hoping you might quantify that for us. I think in the past you've talked about Growth rates at least offline of the module business. Maybe you can talk about whether this is reaching a size where it makes sense to disclose revenue from that piece? Yes. The module business is doing really well, In moduleecommerce business, it's doing really well. And I think that we're beginning To find a way how to grow that business. By no means, this is a full Brom yet, for brome business yet, okay, we haven't really break it out. And But that business now, I see it in its much higher ASP And that will start to grow like 2 years out. It will be a significant difference and Significant contribution to the revenue growth. One other aspect to add, Will, Is that if you look at certain of our end markets and I'll pick automotive as an example, Much more of what they're demanding is not for a specific IC. They want to have a system solution. So if you look, for example, at autonomous driving or ADAS, there has to be Built in fail safe redundancy, you have to have system communications throughout in the example I'm using here That coordinate the cameras, the sensors and the processor. And so you're buying you're creating entire chipsets For a dynamic solution. And just by the natural consequence of how you're designing those solutions, they have significantly higher ASPs. Yes. And to elaborate on that, these are not restricted to only a semiconductor that we designed And we offer entire solutions and we design it. NPS don't produce anything, but NPS, okay, Including semiconductor, we designed the semiconductor. The same time, we designed other components. And now as Bernie said earlier, even in the automotive business, we're selling solutions rather than In the past, we're selling a single piece of a silicon. And in 2 or 3 years later, I don't know how you How can you specify is a NPS semiconductor company, but we are solution providers and we sell solutions Much higher ASP. Yes. That's great. Thanks, guys. Thank you. Our next question comes from David Williams of Loop Capital. David, your line is now open. Thank you, and congrats on the quarters. Thanks, David. I wanted to touch on the capacity Expansion, and you had mentioned this earlier, but how is that progressing? And I guess, is it moving at the same pace as you would have expected, just kind of given Some of the tightness that we're seeing within the industry, is there maybe is that moving at your the pace you expected and maybe the pricing of that, anything surprising there? Yes, capacity expansions that we mentioned about 6 quarters ago, So, Mike, I mean, we started the increase. In the last years, we did some actual works, Okay, to increase the capacities, okay. And from now on, probably a pretty continuous Kind of an increase, okay. And so, Bernie, you can comment on that. Okay. Yes. I think that we've been clear that in 2020, we brought up the 12 inches fab And now we're continuing to qualify parts on that. In 2021, we're midstream and bringing up an 8 inches capacity. We're continuing to qualify parts. One of the underreported stories here is that we have existing relationships with our fab partners That date back as long as 15 to 20 years. And they're excellent relationships and we have been able to manage both in terms of when there's Undercapacity and overcapacity, where we have very even handed relationships. So even within our existing Foundation or base that they've been encouraged and been very positive contributors To helping us add capacity as well. So I think the important point here, as we said in our earlier comments, is that continuous investment Has always been a part of MPS. It's a differentiator. And that We see it as being able to expand over the next several years in order to keep up With the increased demand that we're anticipating. Great. And then maybe just on the leverage you think That's remaining in the model here. Obviously, there's quite a bit that's embedded, but how when we're thinking about gross margin At the end of the year, and maybe even the operating margin, where do you think those could go to as you really start to hit on all cylinders and get the revenue Acceleration that you've mentioned. Well, as a revenue acceleration, we need to continue to invest. And obviously, as I said, we can't grow out of thing here, I said many times, okay. And as long as The growth rate there, okay. We see the growth rate in the next 12 years in the next 12 months. And once we see that, we will invest. Okay. Thank you. Our next question comes from Rick Schafer of Oppenheimer. Rick, your line is now open. Thanks. Hey, guys. I'll add my congratulations as well. I had maybe a couple of questions by end market. I guess, the first one is automotive. I think you guys outgrew SAAR by 35%, 40% last year. And I know tight component supplies Kind of curved Q1 auto production didn't seem to hurt you guys too much. I know your auto business, I think, was up almost 100%. So I guess my question is, I mean, do you see that as an ongoing risk or something that could impact your auto growth? I'm curious, You almost doubled it this past quarter. I mean, could it have been better if it weren't for components supply constraints out there, whether they're direct or indirect? Or I guess any signs things are are things getting better yet in that auto food chain? Yes. Whether as Our growth is restricted by the shortage of a component from our customer size. We don't really know. On the other hand, where total market share is addressable market, Where MPS is so small, so teeny tiny. And so we will notice it. And All these greenfield product growth, I mean, and these are new demand and Right off the bat, look at me and this product is just taking off. Thanks. Sorry, Bernie. I'm sorry, just to add one more quick comment. We have Seeing nothing at this point to indicate that there's necessarily been a slowdown in ordering in automotive. So again, as Michael said, we can't make a guess as far as whether there is a limit on demand, But we see continued strong numbers in our backlog. Great. Thanks. And maybe just a follow-up then on hyperscale. As you highlighted, Bernie, I think you've mentioned hyperscale spend kind of picking up or data center starting to show signs of life. So I'm curious just with the launch of Ice Lake and things are we are picking that up here in that elsewhere as well that hyperscale is getting better. How do you see, I guess, QSMod data center, how do you see that ramping this year? I mean, is it relatively linear from here? Are we going to see A second half inflection of some kind, because that kind of builds some inertia. And I'm also curious, I think last quarter you talked about 48 volt a little bit. I don't know, is it still much too small to kind of break out or talk about? Or can you give a sense of what kind of contribution 48 volt QS mods is now? Thanks. Sure. So let me start with the 48 volt question. I believe that there is significant growth opportunity for us In 48 volt. I think we're very well positioned as far as both GPUs And down the road in the eventual AI. Yes, AI applications and There are even automotive applications that we're positioned there. These are if it's not in the 6 months, probably 9 months, the revenue will be significantly up. Yes. So then turning to your other point, the point of inflection for QSMod and And remember, just for everybody else's benefit, that's our dynamic power management for the CPU processor That really we see good growth in what we refer to as VR13.5, But it's when it goes to 7 nanometer VR-fourteen, which is expected for next year, that that's where we might get much more of an uplift market share gains. Question is, I think you've sort of said 2020 2021 would be investment years, which would somewhat constrain your operating margin. Here in the near term, it looks like your revenue is coming stronger than expected. And so even with that investment, your op margin is expanding. And if I'm doing my math right, it looks like Op margin will be over 31% in June. How should we think about your level of investment as revenue continues to come in Better than expected. Will you continue to invest or do you think you'll drive further operating leverage going forward? I think from now we see the growth opportunity It's even higher than the last than the 3 years ago. And so we will continue to invest, Okay. As long as we see that, okay, as long as we can keep up that kind of growth rate. And that's not we're definitely slowing down, okay, and Until we regroup, okay. So far we see too much opportunities. There is no I guess that's a good problem. Yes. Quinn, I do think that there are further Opportunities for operating margin expansion, but I think that we've tried to be clear on this during the particularly last 18 months That we see that there's more value to our shareholders in being able to accelerate the rate of revenue growth. And that's really where we've been putting most of our emphasis on. Got it. And the second question is, I think you touched on some of this with your Disclosure that new products were 37 percent of sales, but obviously as the investment community worries about how much double ordering may be going on Given the overall industry tightness, I guess I'm wondering, do you guys have a figure you can give us for the percentage of your products That are either sole sourced and or new products, because I think where the threat of double ordering maybe would be on Older products that are dual sourced. And so I guess I'm trying to figure out what percent of your revenue today might be from older products That could have alternative sources. Yes. Let me put it that way, okay. We Have 37% of our products. We have 4,000, 5000 products. Just think about it. And again, And these are 37% of our product. And January, all these revenues A portion of our revenue is still relatively small and still in the ramping stage. And Those products and those products, they are mostly single source. And as you said, these are legacy products. Once the production volume ramps Somewhat into the stabilizer and that they will have a second source. And of course, we Clearly, we experienced some urgency for Even double ordering, okay. And as we said, we try to keep a very, very Just prevent them from lying down at the same time and prevent we prevent them to have a Carry too much of inventory. I don't know if I answer your questions, Maybe Bernie can. Yes. No, that's helpful. I guess, last Quick one for you, Bernie. Do you expect to increase your absolute inventory dollars on hand in the June quarter? Currently, that's what we're modeling, yes. Now, again, Michael was careful to add that This is the supply chain, we have pretty good visibility on the demand. We have to continually try to Test and make sure we understand that. So on the supply chain, we are looking at continuing to increase the dollar value of inventory Sequentially in quarters and demand, we just have to continue to reassess. But as Michael also said, Our time horizon has more to do on the demand front over the next 15 to 18 months as opposed to anything that we're concerned about In the next quarter or 2. Got it. Thank you. Our next question is from Kevin Gerrigan of Rosenblatt. Kevin, your line is now open. Hi, guys. Let me echo my congratulations on the quarter. Just a quick one for me. You alluded a little to it before, but I was just kind of wondering how your MPS Now service and e commerce business did this quarter and how that compares to last quarter, which We've also had some pretty strong growth. And then just kind of looking a little further out as things start to open back up, do you think that business will take a pause? I don't think it's a business taking a pause. And we just started. That would be very upsetting as the business has taken a pause. And if we're taking a pause, I mean, we probably Well, at this time, we're still learning. It may take a pause, okay, I mean, and that's something we haven't really figured out, okay, I mean, but So far, in the last 3 last 4, 5 quarters, and The measurements that way in place and that way put in place and they keep going up And the orders and the interactings and the Demand creation, the value for the index for demand Creations keep increasing. And I think they will turn into our revenues and turn into a much bigger revenues. Kevin, if I could add to that a little bit is the e commerce and the MPS now are just Two legs or two aspects of the much larger story of how we transition from a IC company to a solutions provider That also includes providing fully complete reference designs and a broad array of Solutions in all of our different end markets. So this is really proving the longer term model. And while we are still learning and the numbers are still relatively small, we're in the early innings of this, everything is very encouraging that we're Headed in the right direction and on to something that is very sustainable. Got it. That's very helpful. Thanks, guys. Thank you. If there are any follow-up questions, turn the webinar back over to Bernie. Thanks, Jen. I'd like to thank you all for joining us for the Q1 2021 earnings webinar. I look forward to talking to you again during our Q2 conference call, which you'll likely be in July. Thank you. Have a nice day.