Monolithic Power Systems, Inc. (MPWR) Earnings Call Transcript & Summary

Welcome, everyone, to the Q3 Updated Financial Guidance 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 Cunningham, and I will be the moderator for this webinar. Joining me today are Michael Hsing, CEO and Founder of MPS; and Bernie Blegen, VP and CFO. Analysts, you are currently muted. If you wish to ask a question during the Q&A session, please click on the participants icon on the menu bar and then click the Raise Hand button. In the course of today's webinar, 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 press release published today. MPS assumes no obligation to update the information provided on today's call. We will be discussing gross margin, R&D and SG&A expense 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 press release, which we have filed with the SEC. Now I'd like to turn the call over to Bernie Blegen.

Thanks, Gen, and the hello from Kirkland, Washington. Earlier today, MPS announced in a press release, updated financial guidance for Q3 2020. The purpose of this conference call is to answer questions specific to what was discussed in that press release. We will not be addressing our overall business conditions nor will we provide additional financial guidance other than what we have announced in the press release issued early today. We will provide more information on the Q3 financial results and our Q4 guidance during our next earnings release and conference call at the end of October. Our updated outlook for the third quarter of 2020 is as follows. We are forecasting Q3 revenue in the range of $257 million to $259 million. We also expect the following: GAAP gross margin in the range of 55.1% to 55.3%; non-GAAP gross margin in the range of 55.4% to 55.6%; GAAP R&D and SG&A expenses to be in the range of $75.0 million to $80.5 million; non-GAAP R&D and SG&A expenses to be in the range of $57.0 million to $58.0 million. This estimate excludes stock compensation and litigation expenses. Interest and other income is expected to range from $0.8 million to $1.2 million, including no foreign exchange gains or losses. Our overall business during the quarter increased beyond our expectations for 2 key reasons. First, the majority of the increase was because we were able to fulfill our customers' demand that had been delinquent -- largely delinquent due to past capacity constraints. Second, several China-based customers requested previously scheduled shipment dates be pulled into Q3 2020, which we believe is related to recent trade policy changes. These 2 extraordinary events affected our Q3 2020 revenue outlook are believed to be nonrecurring in nature. We do not believe these events are indicators of higher or lower overall future demand for our products. I'll now open the webinar for questions.

Thank you, Bernie. And let's -- I'd now like to begin our Q&A session. As a reminder, if you would like to ask a question, please click on the participants' icon on the menu bar and then click the Raise Hand button. Our first question comes from Tore Svanberg from Stifel.

Yes. First of all, can you maybe elaborate on the 2 reasons perhaps were they equally contributing to the upside? Or was one more than the other?

Tore, as we said in the comments that the first reason, which was basically customer accommodations primarily related to delinquencies, was the largest reason for the overage. So it was sort of an unusual development for us because we're in a situation where, as you'll recall, that we had relatively low inventories coming into this year and we've been playing sort of a production catch up. And so as a result, in the current quarter, we came into Q3 with a higher level of delinquencies than we've had in our history. And as a result, we actually had some very good fortune as far as being able to accelerate the delivery dates on a number of those, which partially accounted for the overage for the quarter.

Very good. And my second question, and you mentioned that these are extraordinary events. So I guess, why did you decide to eventually shift to that delinquent backlog with the anticipation that maybe some of that is inventory build? Or is that just simply not the way you're looking at it?

No. It's not the way we're looking at it. I'd like to sort of recharacterize. When we create our guidance for the quarter, we're looking at our backlog. And delinquencies have delivery dates that are beyond the current quarter, and so they're not anticipated in that quarter's guidance. What we had was a very targeted and focused effort on the part of our operations and production group and our fab partners in test and assembly that allowed us to service a wider portion of the delinquencies than we would have normally expected. Having delinquencies is a part of our business, as you've seen our performance in many quarters past, this has not risen to the level that we saw in Q3 that's why we're calling it out as nonrecurring and extraordinary.

Yes, Michael here. The reason we couldn't foresee that clearly in the past quarter is because whether the delinquency are still there or not, that was a one issues. The second one is whether we can meet those demand in our -- when we're expanding our capacities. Everything has to ramp up, and there's no -- we have identified where the bottleneck is and we resolve all these issues. And as we said earlier in our prior earnings call, we said that we are working day and night and to resolve those bottlenecks. And so as a result of our effort and also the delinquency -- those products, still -- our customers still need those. And so -- and that they still want to pull in and employ shifting days and demand as ship as many as we can, as fast as we can. So that's the reason.

Well congratulations on the $1 billion run rate.

Our next question comes from David Williams from Loop Capital.

Can you hear me?

Yes, we can.

Apologies, technical difficulties here. But congrats on the quarter and -- or the new updated forecast. I guess if we're kind of thinking about the delinquency we're able to fill, how much additional delinquency do you have? You talked about it being the highest in your history. So what additional delinquency do you have in the backlog? And then how should we think about that being cleared as we head into 4Q, given the capacity expansion that you brought up?

Yes. We don't have quite closed the quarter yet. And so as you can think about it on the Q3 growth, there's 3 components of it. And one is the normal business expansions and revenue growth. And that we look at the back then we're very similar to the last 4, 5 years. Again, you can see the same kind of patterns. And delinquencies will be, of course, over -- on top of it. And also as well as the Chinese customers pull-ins that will -- that's a -- all these add together will be a -- these are 2 factors that will be extraordinary event. So otherwise, the business is pretty normal.

Okay. All right. And I guess it's fair to assume that some of the pull-ins were not those parts that were on allocation. Or was some of the pull-ins also related to the increased capacity?

The pull-in, and there will be a commonality there numbers like and some of them is relate -- they're within the pull-in, within the delinquencies. And all these account loaded, we cannot separate those. But we're pretty much clear, okay, whether again they -- and they want to -- what kind of products that they want to pull-in, but we can't just have all the details, very concrete numbers.

Okay. And then just last one for me. If we're kind of thinking about the gross margin, it looks like some of the excess revenue was maybe a bit dilutive. Should we think about the trajectory as we head into the next couple of quarters, kind of keeping the same cadence you talked about before? Or should we expect a step down as we kind of go forward? Is this a level set?

No, no. I think your observation is accurate and a lot of the incremental business in the current quarter was at a level that was lower than we had been previously anticipating when we gave our original Q3 guidance. And it is our intent to be able to resume our cadence of improving or expanding gross margin 10 to 20 basis points sequentially.

Our next question comes from Rick Schafer from Oppenheimer.

And let me echo the congratulations on the quarter and the upside. I guess my first question is, should we assume with this announcement that your largest China customer is now out of the model going forward? And if so, how do you fill that hole? I mean, I think it was a relatively significant customer. So it doesn't sound like you're seeing any change to fourth quarter or for 4Q outlook based on the release, so I don't know if there's any way you could comment on that or talk maybe about -- some color maybe on where backlog is heading into 4Q. Or just any way to kind of give us some comfort around 4Q.

Sure, Rick. I don't necessarily want to try and confirm our Q4 outlook as we haven't commented on that previously, except for the prepared comments that the current events don't either strengthen or weaken our outlook relative to Q4. I think you're very familiar that the strength of MPS' long-term model is really the diversification by customer, by end market and by application. So as we look forward, things that we've talked to as recently as Q1 and Q2 is that the growth drivers have really included things like SSD and computing, automotive, AC/DC modules. And there are so many others that I think, I believe that there's an awful lot to consider as you look beyond the current year, but as far as our long-term model, all those fundamentals remain in place.

Yes. And we don't want to speculate whether we will have the customers or not, or what is a large contract, how the trade policy affected the MPS revenue. We cannot speculate it, we cannot predict that. And -- but if you're looking at it and not putting those revenue and MPS in within this quarter, it has a significant growth. And it may not trigger this preannouncement. And -- but the growth is still very much intact, and with or without a one, any particular customers, and our growth trajectory will be a very similar to last few years.

Okay. And then if I could just add one more. Obviously, you guys are accelerating capacity adds. You're able to obviously fill some delinquencies this quarter. But the capacity is ongoing, right? Chinese foundry plus the non-existing -- non-Chinese foundries. I guess, my big -- kind of, I guess, high-level question is, what does that mean for spending as we look forward? And I don't know, Bernie, if you can quantify that as sort of a percent of top line growth? Or just any kind of color you can give. But it seems like maybe we're going to be in a -- for at least the near term, maybe an elevated spend cycle to kind of catch up to demand here.

Yes. I think if you'll recall, during the Q2 earnings call, we -- during the Q&A. Historically, we had guided that expenses would grow at a percent less than revenue growth. And now we sort of set the bar that as we anticipate and we announced at that time that we were looking at 2 new fab relationships outside of China in order to get better geographic dispersive that -- disbursement, that we were going to continue to invest and probably at a level that is more at parity with revenue growth going forward. So I can't predict necessarily how fast we will be accelerating these efforts, but many of them were already in place before this quarter.

Our next question comes from Quinn Bolton from Needham.

Hopefully you can hear me. Just wanted to come back to the second of the 2 extraordinary factors. The pull-ins, I guess, by definition, if you see demand pulling into the third quarter, it's got to be pulled forward from either Q4 or Q1. Michael, I think you said your longer term outlook to future quarters is unchanged. And so to the extent that you saw some of the Chinese customers pulling in demand into Q3 because of trade tensions, are you sort of implying that the outlook for either non-Chinese customers or various parts of the business is coming in to fill in whatever might have been pulled out of future quarters into the third quarter, and hence, that's why your future revenue outlook is unchanged?

Because -- yes. Earlier, I said that, the reason I said that we see all the other growth, and all the other growth is not from the Chinese customers. And our Chinese customers is not a large, it's still less than 10%. And so overall growth, and of course, that would be impacted, but impacted much smaller numbers as the overall growth is -- will feel that and won't be that 10% of a difference.

Okay. Okay. And then the second question, you guys recognized revenue on ship in to distribution. I think all semiconductor companies do know with ASC 606. But wondering if you guys get point of sales data from your distributors. Can you tell whether that demand is moving through the distribution channel end-to-end customers? Or are these delinquencies really going to fill distribution inventory rather than end-user demand?

Yes. I mean, historically and consistent with what we did here in Q4, we're trying to satisfy real demand because we've had the shortages as far as being able to meeting all demand, we've been very careful not to build either inventory in the channel or on our customers' shelves. We wanted to go into production because we can't afford to have units when other customers are not getting their demand fulfilled. So there might be a quarter-end increase in the channel only as they are part of the throughput. But again, we believe that what we're doing here is responsive to our customers' requirements, and it is not representative of a channel build or building our customers' shelf on inventory in their shelves.

Got it. Thanks for that color, Bernie. And the last one, just can you give us any sense, was the demand upside pretty broad-based across all 5 of the end markets? Or was it more driven by communications, consumer and computing, and perhaps less so by automotive and industrial?

Yes. At this point, I prefer not to make a comment on what the end market distribution is. I am aware that it is broad-based and save that question for Q3.

Well it is a very broad based, yes.

Our next question comes from Matt Ramsay from Cowen.

Yes. I guess, from me, you guys have been ramping and you talk about the investments to ramp capacity. And there's going to be some long-term investments outside of China, but you were able to fulfill some of these delinquencies by ramping capacity. I wonder if you guys might characterize where you think your capacity is now relative to where it might have been 6 months ago or 9 months ago to start the year when you were capacity constrained. Like how much in aggregate have you guys added that will be there on a permanent basis going forward?

Let me take a start at this. And really here, again, I don't want to get bogged down in too many details. So I think we can address capacity issues in Q3. What I will say, and I'm just echoing Michael's earlier comment, that we actually have provided input that our production and operations people are working almost 24 hours a day in order to secure additional capacity within our existing fab and assembly houses. And the results of those efforts are really what was driving this opportunity.

Yes. It's obvious, look at this Q3, we can ship this much, and as a way above our anticipations in the earlier years. And one way -- at the stage that we're facing shortages, okay? And we stated that in Q1 into Q2, we're working very hard to expanding the production capacities. And well we started last year actually. So it's -- but whether is it enough or not, I can tell you, we're still dealing with it.

Got it. Yes. Thank you for the color there. I guess, we've talked about over the last couple of years that you guys have maybe used some of the consumer business to sort of balance out the gradual expansion of the gross margin. And maybe that was some of the areas of little -- so can you talk a little bit, Bernie, about where you feel like the backlog is right now? Michael, you just mentioned there are some -- still some delinquencies. If you could quantify any of where the backlog is or where the delinquency level is right now versus where you're running, that would be really helpful.

Yes. And again, we've tried to be careful because we don't want to set expectations for Q4 until we've had time to aggregate all information available. So I will say that we have reduced level of delinquencies more to a normalized level. And that's why we're not calling it out as a further or a future exception. But I want to be careful not to provide any expectations around additional momentum or a heightened level of demand because we don't have an opinion and we don't want to express one now.

Got it. Just really quick, last one for me. I noticed there was a decent amount of upside in OpEx in the quarter in addition -- I guess, coincident with the revenue. It is -- and you mentioned investing for more capacity going forward, et cetera, that's going to continue. Is that sort of onetime step-up in OpEx? Is that sort of a new baseline? Or was some of that onetime in nature as well?

No. The operating expense levels are reflective of our investments, as we said, to secure resources for our future growth as well as to expand our capacity. And we would expect, as we relayed at the Q2 earnings call, that we expect this to continue for, as yet, an unspecified period of time. But I would probably guess that we're looking at the next 8 to 10 quarters minimum.

Yes, we will provide more information in our Q3 earnings call.

Our next question comes from Ross Seymore from Deutsche Bank.