Welcome everyone to the MPS Second Quarter 2021 Earnings Webinar. Please note that this webinar is being recorded and will be archived for one 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. During this webinar, we will discuss our Q2, 2021 financial results and guidance for Q3, 2021, followed by a Q&A session.

Thanks, Jen. MPS achieved record second quarter revenue of $293.3 million, 15.3% higher than the first quarter of 2021 and 57.5% higher than the second quarter of 2020. This broad-based year-over-year revenue growth was a result of our diversified growth strategy, technological innovation, and investment in production capacity. Turning now to our second quarter 2021 revenue by market, computing and storage revenue of $87.7 million increased 30.0% from the first quarter of 2021. The sequential revenue improvement reflected increased demand and market share gains for servers and data centers and notebooks. Computing and storage revenue represented 29.9% of MPS' second quarter 2021 revenue compared with 34.4% in the second quarter of 2020. Second quarter consumer revenue of $76.1 million increased 14.9% from the first quarter of 2021. The sequential quarterly revenue increase reflected earlier than normal sales of gaming console products. Consumer revenue represented 25.9% of MPS' second quarter 2021 revenue compared with 25.6% in the second quarter of 2020. Second quarter automotive revenue of $48.7 million increased 8.5% from the first quarter of 2021, primarily due to increased sales of infotainment products. Second quarter 2021 revenue was up 173.9% year-over-year, automotive revenue represented 16.6% of MPS' second quarter 2021 revenue, compared with 9.5% in the second quarter of 2020. Second quarter 2021 Industrial revenue of $43.3 million increased 8.9% from the first quarter of 2021, reflecting increased sales of products for power source applications. Industrial revenue represented 14.8% of our total second quarter 2021 revenue compared with 14.3% in the second quarter of 2020. Second quarter 2021 communications revenue of $37.5 million was up 3.9% from the first quarter of 2021. Most of this sequential revenue increase was due to higher product sales for networking and wireless applications. Communication sales represented 12.8% of our total second quarter 2021 revenue compared with 16.2% in the second quarter of 2020.

Our first question comes from Tore Svanberg of Stifel.

Yes, thank you, Michael, Bernie, congrats again on another strong and record quarter. I was hoping you could update us on your capacity plans. I know you've done a pretty good job here the last 18 months, your inventory seems to be in good shape, perhaps a bit at the lower end. But yes, maybe you could help us understand a little bit more what you specifically are doing on the capacity side.

Thanks, Tore. Our capacities, as always in the past three or four years, have been expanding, and now we continue that. However, we do have capacities of over $2 billion and before the middle of next year. So we have enough capacity for us to grow. And now we have just qualified more products to release to production and ultimately in our customers' hands.

And at the expense of repeating ourself, you recall that last year, we brought up the 12-inch fab. And this year, we've brought up 8-inch fab, which is already contributing to inventory. So in both cases, what we're continuing to do is expand out by qualifying more parts so that we will be able to meet the $2 billion level by the middle of next year.

Very good. Thank you for that. And your cash balance has doubled here over the last couple of years, and it's now at $670 million. Obviously, it's a luxury issue to have. But what do you intend to do with that cash? Because obviously, you don't need that much. So do you plan to return that more back to shareholders? Are you potentially looking at M&A? And the reason I'm asking this is because it's so high now, right? I mean, I know historically, you've grown your business organically, but it's so high now that I just have to ask the question what you intend to do with it?

That's a good question. As a company, I keep saying we are transforming from a semiconductor to more solution providers, so we can utilize our cash much better than we can in the past, and the strategy is okay, we will acquire tuck-in technology companies comparable to MPS revenues and general market coverage. On the other hand, we are also consistently raising dividends. And that's our strategy, but we're not excluding share buybacks.

Our next question is from Quinn Bolton of Needham.

You guys hope you can hear me, but let me echo my congratulations on the strong revenue and the very nice gross and operating margins. Bernie, I guess you teased us there at the end of your script, saying that you've got the capacity now to support acceleration in revenue growth. If I look at revenue last year, you did about 35% growth that looks like this year; you might do better than that. I'm just trying to interpret when you talk about acceleration in revenue growth, what should we read into that?

Yes, I think that you're familiar with our model, which is to outperform the industry by 10 to 15 percentage points. Obviously, that's a model, that's a guideline. There are certain periods where we have the right factors, both strategically and from a market perspective, that allow us to do better, and sometimes not as well as that model. So, for example, if you look at last year's results, you could argue that at 34.5% growth, we exceeded the market, which was about 5% to 8%, depending on what you're looking at, by somewhere in the neighborhood of, 15-17 percentage points. We look at that as well above our model; in the current year, obviously, we only guide to Q3. But it's not unrealistic to expect that within the range of possibilities we could match that performance or, in fact, do just a little bit better.

Great, thanks for that additional color. Bernie, I also wanted to ask on the compute and storage business up 30% sequentially, I think you mentioned that it was share gains in both servers as well as notebooks. On the notebook side, I thought you already had pretty high share at the high end of the notebook market. So I'm wondering if you could comment, are you starting to see share gains and maybe more mainstream or even low end or Chromebooks on the notebook side? And are there any notable areas of share gains on servers? Thank you.

Yes, so we do have some share gain across the board in the notebook market segment. As our technologies advanced, we have lowered costs, and our die size has become much smaller. This allows MPS to enter a lower notebook segment.

As far as server, we've been fairly consistent in articulating our strategy to grow our market position with each succeeding generation, particularly Intel and AMD products. Not limited to that though, but also on 48 volt GPUs. This really emphasizes the point that we're branching up in share gains within the Intel family while also branching out into other opportunities.

Our next question is from Rick Schafer of Oppenheimer.

Thank you, and I'll add my congratulations. Just kind of keep amazing, everybody. I think I'll ask one more capacity question, if that's okay. And it's coming from a spending standpoint. Can you, Bernie, maybe remind us what the outlook for spending is just as a general rule as a percent of revenue, maybe starting next year once all the new capacity is installed? I mean, I think you're getting so many questions because everybody sees the kind of growth you guys are putting up. And it's awesome that you have $2 billion in capacity onboard by this time next year. But at this rate, it's only going to be in a couple of years, right? You're going to be bumping your head on this. So I'm curious about how soon you'd have to look to begin ramping incremental capacity again? What might impact that spending? I'm curious what like, just hypothetically, in two years, three years' time, if you're at $2 billion top line, like what would gross margin look like, for instance?

Rick, thank you. Good question. Something that's really important to comment on here is that a lot of companies, analysts, and investors are focused on capacity as if this is a new aspect of the semiconductor business. In fact, capacity is something that we have been managing for the 10 years that I’ve been here, before that. It's an integral component of our growth strategy. The way we've been doing it is by sequentially adding new fabs and also assembly houses and testing capacity alongside of that to accommodate expected revenue growth. While we have made public comments on the fabs we've invested in to date, we're still continuing on with ongoing relationships to secure more fab capacity for the future.

As I said earlier, we keep expanding and we will never stop. But sometimes it's faster, and other times it's slower. Beyond the physical capacity itself, we have to increase staffing as MPS is very lean, and so we will be hiring a lot of people.

Thanks. Sorry, I was having some trouble on my end. Thanks, Michael. And thanks, Bernie. Quick question on automotive, if I could. I mean, by my math, it's on track to maybe grow sort of in the 80% or better range this year for you guys. I'm curious how much of that is being either directly or indirectly limited by supply? If you could give a sense of what growth could be or talk about growth maybe demand that's pushed and how that ultimately would show up in the model next year? I don't know if you could quantify or talk about your auto backlog and where it is today.

Maybe Bernie can answer this. You mentioned whether the automotive product is limited by capacities. The answer is not as much as other segments. Automotive companies give us long lead times, and we prepared last year because our customers didn't consume that many of our products. So it all translates to this year, and so we'll be able to ship them now.

One of the aspects of automotive that's getting a lot of attention in the press has to do with electronic component shortages that are shutting down plants or limiting their ability to kit a car for assembly. As Michael just said, we're actually not capacity constrained there. We are meeting all demand from them. What's interesting is one of the reasons that automotive got into this situation has to do with them working with a just-in-time inventory model. I think they've learned from that. When the electronic components are available, they will stock them, even if they don't have a complete kit to build the car. In our conversations and feedback, we're getting is that they’re only trying to satisfy real demand. The timing of their build plan will dictate when they can complete kits to build cars. We want to monitor this because there has been no change in the ordering pattern or our shipment schedule versus expectations due to the limitations in automotive.

I might as well add that about a year and a year and a half ago, our inventory was at an all-time high. That was one of the reasons why we had that because we were newcomers in the automotive industry. Even with this type of current revenue, we're still a very small percentage of the market, so it was clear as newcomers, we didn't want to upset customers, and we didn't have product. So all this effort we did to meet customer demand has now benefited us. We've gained a lot more design win activities because our competitors couldn't ship a product.

Our next question is from William Stein of Truist.

Thanks for taking my question. I hope you can hear me. With regard to maintenance question about your capacity and inventory, which you've already explained quite a bit about on this call. Are you supply constrained at this time? Are you able to meet all the demand, whether it's upside, or maybe customers stretching and trying to build a bit of inventory? Or are you in fact capacity constrained? And are your lead times extended as you're communicating them to customers? Then I have a big question of more strategic after that.

Yes, let me explain that way. We have less capacity constraints than compared to about half a year ago. However, as a customer's requests come in after qualifying new fabs, we have a month or a couple of months delay in qualifying those products. Qualifying a fab isn't exactly a science, because you use different suppliers, equipment, and materials. Different problems arise, and all these issues affect how we qualify products in the end. So to answer your question, it's kind of a constraint. We have a lot more orders, and we're unable to fulfill them, but only a couple of months late.

Again, we're trying to make sure that we're servicing real demand, not building up inventory either in the channel or on our customer shelves. We've established very transparent relationships with our customers, so we can make those trade-offs.

Great, thanks. And then the follow-up if I can, or the more strategic question, Michael, you referred to this transition from a semiconductor company to a technology solutions company. It's something I've written about specifically the transition from semiconductor devices to modules. Any quantification around this, and perhaps it relates to the e-commerce strategy as well. Any update in that area would be very helpful. Thank you.

Yes. Thanks for asking that question. Now, it’s overwhelming by the revenue growth in the company, but not only from analysts outside, and inside the company, it’s overwhelming due to the revenue growth, the allocations and the product allocations in a lot of strategic areas are less pronounced. The module business is very much aligned with our transition to being a solutions company. On the e-commerce side, we have organized like a product line, and our activities in the last quarter have quadrupled. The revenue is still small, but it's in the millions of dollars, more than a million dollars, somewhere between $30 million and $40 million.

Our next question is from Joshua Buchalter of Cowen.

Hey, guys, congrats on the results. Thanks for taking my question. Gross margins in both the print and guide were meaningfully higher than your usual 10 to 20 basis point trajectory. Can you elaborate on the key drivers of the leverage there? And I guess speak to the sustainability? Was it driven by mix or something on the cost side getting wafers through your recently ramped fabs? Thanks.

Sure. I think we've discussed in the past that our model aims to enable us to grow gross margins by 10 to 20 basis points sequentially, over the long haul. We've demonstrated very good consistency in achieving that. But much like I was describing before, this is an unusual period of growth for the company. The overheads, which include direct spending or inventory provisions, are not growing at the same rate as the revenue growth. That's where we're getting the near-term leverage. As we look out, we don't want to create the expectation that we'll be able to grow at the same rate but by the same token, we have established another floor level for what we expect sustainable gross margin to be.

That's helpful. Thank you. And then also on the model. I guess you mentioned that consumer in console was a bit accelerated versus your normal seasonality. Can you remind us what you would expect the shape of the console business to look like in the second half? And maybe just give us some clues on revenue growth by segment? Thank you.

Sure. I don't know if we call it normal anymore. Regarding our console business, yes, we've gained a lot of design wins in the next design, and I believe the business will continue. You would have better judgment than us regarding the seasonality for consoles.

Michael makes an excellent point. We've had so many fluctuations among our different lines of businesses. The traditional seasonality tied to certain products is not as applicable as it might have been back in 2018 or 2019. We believe we are optimizing across all our different end markets. The strength of our model lies in our diversification. The current year is benefiting significantly from automotive and computing storage in particular. We believe the longer-term drivers will be automotive and communications.

Our next question is from Tore Svanberg of Stifel.

Yes, thank you. I just have a few follow-up questions. First of all, I have a question on your ASPs, which are obviously tied to your revenue growth. So now that you are sort of growing in the 50% range, how much of that is units versus ASPs?

Yes, I would say if you look at last year, last year is representative of what we're doing in 2021. Of the 34.5% growth, 25% of that was tied to volume, and 10% was tied to price. When Michael talks about the solutions business, previously selling an individual piece of silicon for $0.20 to $0.25, now depending on the module, we can get between $1 to $3. We’re looking to design complete integrated solutions for different applications, where the total cost can be somewhere between $60 to $100. So there's the ASP for the individual component, but more importantly, we want that attach rate with the total solution.

Very good. And talking about systems, how's your motor business doing? I know that's probably the highest ASP product you have. So how's that business going?

It's doing well, but the rest of our company is growing much faster. So it's still small. We can't break out a percentage yet. But I think we will provide more detailed category information as we divide it into finer product lines. We'll give you these numbers later.

Sounds good, Michael. And last one, about a year ago, you talked about getting into the medical end market. Any updates there? I mean, I know it's still probably a very, very small percentage of revenue, but just trying to understand how fast your traction is in the medical end market.

Yes, we have our product now, and we're generating revenue from ultrasound. We see revenue now. As for other areas, such as x-ray machines, we are evaluating the first silicones, and we have minor issue with the fab. However, we will be able to solve that problem. The performance is about 5x to 6x better than existing solutions, so the image is much cleaner now. We could deliver, and I believe the customers are waiting. We're very excited.

One other comment to add here is that the technology we’re referring to is related to our high-performance precision analog converters.

Yes, it’s about data converters as well. This has been something we've been working on for around 2.5 to 3 years now.

Our next question is from Kevin Garrigan of Rosenblatt.

Hi, guys, congrats on the quarter. And thanks for taking my question. Just a quick one for me. I was wondering if you could tell us what percentage of your business or backlog is based on three-year newer products. I think last quarter; Bernie and you had said new products introduced in the last three years were about 37% of sales. So just kind of wondering if this was in the same range this quarter?

Yes, the reason we used that stat one time was to give order of magnitude to how dynamic this new product introduction is as a component of our growth. Right now, in such a short one-quarter term, it hasn't changed a whole lot up or down. But it's really not something we want to report on an ongoing basis.

Yes, I think the last time we reported it was 37%. I went back and looked at it, and we actually cannibalized ourselves. That's a better way, okay, rather than having the competition eat us alive. I think that we cannibalized quite a bit; I think it’s somewhere in the 10% range.

But I would say when there’s cannibalization involved, you can bet that it reflects market share gains against our peer companies, and that’s really the leverageable part of this story.

Our next question is from Quinn Bolton of Needham.

Hey, guys. Just wanted to follow up on Joshua's question on gross margins. I know in the near term, better overhead absorption is driving the better margins. If you guys have access to capacity, and most of your competitors are getting strained, I'm wondering if there’s room for you to raise pricing in certain segments to take advantage of that capacity support? Or will you just continue to put your foot on the pedal and try to drive as much revenue through that additional capacity to support rather than trying to do it through pricing?

Well, yes. MPS is still the smallest analog semiconductor business, and at the same time, we want to deliver consistent results. You see our margin even in this period don't fluctuate a lot because we don't just randomly raise prices. We don’t gouge prices because of shortages, as that would negatively affect our long-term relationships with our customers. Our strategy seeks to maintain and manage our margins, which fits everything for us.

As there are no further questions, I would now like to turn the webinar back over to Bernie.

I'd like to thank you all for joining us for this webinar and look forward to talking with you again during our third quarter webinar, which will likely be at the end of October. Thank you, and have a nice day.

Have a nice day.