Earnings Call Transcript
MONOLITHIC POWER SYSTEMS INC (MPWR)
Earnings Call Transcript - MPWR Q3 2021
Genevieve Cunningham, Moderator
Welcome, everyone, to the MPS Third 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 Q3 2021 financial results and guidance for Q4 2021, followed by a Q&A session. 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 earnings release published today. Risks, uncertainties, and other factors that could cause actual results to differ are identified in the safe harbor statements contained in the Q3 2021 earnings release and in our SEC filings, including our Form 10-K filed on March 1, 2021, and our Form 10-Q filed on August 9, 2021, which are accessible through our website, www.monolithicpower.com. MPS assumes no obligation to update the information provided on today's call. We will be discussing gross 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 Q3 2020, Q2 2021, and Q3 2021 releases as well as to the reconciling tables that are posted on our website. Now I would like to turn the call over to Bernie Blegen.
Bernie Blegen, CFO
Thanks, Genevieve. MPS achieved record third quarter revenue of $323.5 million, 10.3% higher than revenue in the second quarter of 2021 and 24.7% higher than the comparable quarter in 2020. Looking at our revenue by market, third quarter 2021 industrial revenue of $52.2 million increased 20.5% from the second quarter of 2021, due primarily to increased revenue for industrial meters and power sources. Industrial revenue represented 16.1% of our total third quarter 2021 revenue. Third quarter 2021 communications revenue of $44.7 million was up 19.3% from the second quarter of 2021, primarily due to increased infrastructure demand. Communication sales represented 13.8% of our total third quarter 2021 revenue. In our computing and storage market, third quarter revenue of $98.6 million increased $10.9 million or 12.4% from the second quarter of 2021. The sequential quarterly revenue growth primarily reflected sales gains in storage applications. Computing and storage revenue represented 30.5% of MPS' third quarter 2021 revenue. Third quarter automotive revenue of $54.4 million grew $5.7 million or 11.7% over the second quarter of 2021. This improvement reflects continued gains in applications for infotainment, lighting, and ADAS. Automotive revenue was 16.8% of MPS' total third quarter 2021 revenue. In our consumer markets, third quarter 2021 revenue of $73.6 million fell 3.3% from revenue reported in the second quarter of 2021. This decrease in consumer revenue reflected lower handset sales. Consumer revenue represented 22.8% of our third quarter 2021 revenue. Third quarter 2021 GAAP gross margin was 57.6%, which was 160 basis points higher than the second quarter of 2021 and 245 basis points higher than the third quarter of 2020. Non-GAAP gross margin for the third quarter of 2021 was 57.8%, 148 basis points higher than the gross margin percentage reported from the second quarter of 2021 and 231 basis points higher than the third quarter from a year ago. Third quarter 2021 gross margin on both a GAAP and a non-GAAP basis included a $4 million litigation settlement. Excluding this one-time benefit, non-GAAP gross margin would have been 56.6%, essentially flat with the second quarter of 2021 and 110 basis points higher than the third quarter of 2020. Our GAAP operating income was $77.1 million compared to $60.6 million reported in the second quarter of 2021 and $60.0 million reported in the third quarter of 2020. Our third quarter 2021 non-GAAP operating income was $108.4 million compared to $94.9 million reported in the prior quarter and $84.9 million reported in the third quarter of 2020. Let's review our operating expenses. Our GAAP operating expenses were $109.2 million in the third quarter of 2021 compared with $103.6 million in the second quarter of 2021 and $83.1 million in the third quarter of 2020. Our non-GAAP third quarter 2021 operating expenses were $78.7 million, up from the $70.3 million we spent in the second quarter of 2021 and up from the $59.1 million reported in the third quarter of 2020. The sequential increase in Q3 non-GAAP operating expenses primarily reflected increased spending in R&D for qualifying parts for production and securing foundry capacity. The differences between non-GAAP operating expenses and GAAP operating expenses for the quarters discussed here are primarily stock compensation expense and income or loss on an unfunded deferred compensation plan. For the third quarter of 2021, total stock compensation expense, including approximately $922,000 charged to cost of goods sold, was $31.6 million, compared with $32.1 million recorded in the second quarter of 2021. Switching to the bottom line, third quarter 2021 GAAP net income was $68.8 million or $1.44 per fully diluted share compared with $55.2 million or $1.16 per share in the second quarter of 2021 and $55.6 million or $1.18 per share in the third quarter of 2020. Q3 non-GAAP net income was $98.6 million or $2.06 per fully diluted share compared with $86.5 million or $1.81 per share in the second quarter of 2021 and $79.4 million or $1.69 per share in the third quarter of 2020. Fully diluted shares outstanding at the end of Q3 2021 were 47.9 million. Now, let's look at the balance sheet. Cash, cash equivalents, and investments were $744.5 million at the end of the third quarter of 2021 compared to $672.9 million at the end of the second quarter of 2021. For the quarter, MPS generated operating cash flow of about $117.8 million, compared with Q2 2021 operating cash flow of $96.9 million. Third quarter 2021 capital spending totaled $18.6 million. Accounts receivable ended the third quarter of 2021 at $79.9 million, representing 22 days of sales outstanding, which was two days lower than the 24 days reported at the end of the second quarter of 2021 and 11 days lower than the 33 days at the end of the third quarter of 2020. Our internal inventories at the end of the third quarter of 2021 were $208.1 million, up $30.8 million from the $177.3 million reported at the end of the second quarter of 2021. Inventory at the end of the third quarter of 2021 represented 134 days, which were nine days higher than at the end of the second quarter of 2021. Historically, we have calculated days of inventory on hand as a function of the current quarter revenue. We believe comparing current inventory levels with the following quarter's revenue provides a better economic match. On this basis, you can see inventory at the end of the third quarter of 2021 represented 135 days, 18 days higher than the 117 days at the end of the second quarter of 2021 and six days higher than the 129 days at the end of the third quarter of 2020. Currently, our inventory levels remain lean. We are working very hard to return inventory to the 180-day to 200-day level necessary to support our future growth. I would now like to turn to our outlook for the fourth quarter of 2021. We are forecasting Q4 revenue in the range of $314 million to $326 million. We also expect the following: GAAP gross margin in the range of 56.0% to 56.6%; non-GAAP gross margin in the range of 56.3% to 56.9%; total stock-based compensation expense of $30.8 million to $32.8 million, including approximately $950,000 that would be charged to cost of goods sold. GAAP R&D and SG&A expenses should be between $107.8 million and $111.8 million. Non-GAAP R&D and SG&A expenses to be in the range of $77.9 million to $79.9 million. Litigation expense is expected to be in the range of $3.5 million to $3.9 million. Interest income is expected to range from $1.0 million to $1.4 million. Fully diluted shares to be in the range of 47.9 million to 48.9 million shares. In conclusion, we are continuing to execute our strategy. I will now open the webinar up for questions.
Genevieve Cunningham, Moderator
Thank you, Bernie and analyst. I would now like to begin our Q&A session. Our first question comes from Tore Svanberg of Stifel. Tore, your line is now open.
Tore Svanberg, Analyst
Yes. Thank you and congratulations on these continued stellar results. First question, and not to pick on segments, but your consumer segment was down sequentially, and you talked about cellphones. I wasn't aware -- we don't think power had that much exposure to cellphones. Is this mainly on the charger side or anything else there that we should be aware of?
Michael Hsing, CEO
Hi, Tore. Yes, I think it is on the charger side. And we do these fast charging solutions, and we've picked up some revenues in the last few years in those cellphone companies. And they thought that they could have a more adoption in the market. So they have some inventories, but it's an unusual way of charging phones, and that has not become very popular yet.
Tore Svanberg, Analyst
Great. Thanks for clarifying that. And as my follow-up, you have a luxury problem now. You have about $0.75 billion in cash on your balance sheet. I know you're out there trying to secure more capacity. So first of all, could you update us on where you are on securing capacity, especially for the next few years? And related to that, will you start to use some of that cash more aggressively to potentially buying more equipment as you continue to obviously show very strong growth? Thank you.
Michael Hsing, CEO
All right. Let me answer the first part first. The expansion is still on track. The fab issues have reduced, and we are on the way to expand our capacity in the middle of next year to support over $2 billion of sales. But at the same time, we will need to buy more equipment for testing, qualification, and also, we need to hire more people. As you know, qualifying each part takes time. The revenue opportunities are there; it's just a matter of time. On the second part, we need to be more careful about our spending; our shareholders are very critical about that. So we will be spending money more sensibly.
Bernie Blegen, CFO
I think if I can just add to Michael's comment is that as far as the model that we've always pursued, it was to have our fab partners and our assembly house partners absorb much of the capital required in order to build up capacity, and that remains our strategy as a fabless company. So nothing has changed in our model. We're just adapting it to this rate of growth that we're enjoying right now.
Tore Svanberg, Analyst
Thanks again. I’ll go back in line.
Genevieve Cunningham, Moderator
Our next question is from Matt Ramsay of Cowen. Matt, your line is now open.
Matt Ramsay, Analyst
Thank you very much. Good afternoon, everybody. For my first question, Michael, I wanted to ask about a couple of the different computing markets that you guys have product to support. The first one, I think you could -- I don't know, from my perspective, if you could kind of drive a bus through what different PC expectations are for next year. And I wonder if you might touch on what -- rough percentage, Bernie, of revenue might come from the notebook market? And what your underlying planning assumptions are on the PC market for next year? And I guess, in contrast to that, how -- Intel is launching Sapphire Rapids, AMD is launching Genoa next year. What kind of a tailwind from a content perspective could those upgrades in the server market be? And then I have a follow-up. Thanks guys.
Michael Hsing, CEO
Okay. For the notebook side, we obviously gained market shares in the high-end notebook sector during the tail end of the pandemic. And we have increased significantly our market share. But the story there is not just that we gained, that's all we can get. As we increased our new generation with our technologies that are in place, we will further reduce costs and will address the high-end of our consumer side. Allow me to address the server side; we are still very, very small players. There's a lot more room for MPS to gain.
Bernie Blegen, CFO
I don't think that we've ever specifically broken out what percent of the group's revenue is tied to any one of the categories that we track. But I think we have been clear that in each of the last two years, the growth in notebooks has outpaced the rest of the sectors, including server and storage. Now having said that, one of the things that we're benefiting from is that diversification of how we're positioned in this group. As Michael indicated, we are a relatively small player when it comes to core power management for servers and we believe that with both the next generation of Intel and AMD processor releases, we stand to benefit from market share gains. In the more near-term element, as we called out in Q3, we're actually seeing a nice increase in storage sales, which is usually a precursor to ongoing infrastructure spending within the data centers. So I think that we're having great difficulty, as anybody, in understanding when work from home or work from work, as it relates to notebooks, begins or ends. But I think that we're well positioned because of our diversification to enjoy continued growth in this category for a number of years.
Matt Ramsay, Analyst
Yes. Thank you.
Michael Hsing, CEO
Let me go back to the notebook side. I think that part of the question I didn't answer. We are still facing shortages and there is still a lot of demand in the notebook sector. We see revenues from that side to continue strong, even into the middle of next year.
Matt Ramsay, Analyst
Got it. Thank you very much for all that commentary guys. Just a quick couple of things on gross margin. One, Bernie, the one-timer that was in Q3, any particular reason you didn't pull that out of the non-GAAP number? And secondly, with the pricing environment that we're feeling today, how do you guys think about price increases going forward relative to input costs and what that could mean to margins? Thank you very much.
Bernie Blegen, CFO
I'll take the first half of that question real quickly. And then Michael will give comments on the second. As far as how we try to manage GAAP and non-GAAP reporting, it is really a reflection of what is cash. In this case, we highlighted that there was a settlement, and that was a cash payment that we received. That's the thinking behind not adjusting it as a non-GAAP item. Conversely, if we have something that works to our detriment and it also has cash implications, we wouldn't non-GAAP that out either. So the two areas that we stay pretty closely to are stock compensation, gain and loss from a deferred compensation plan, and if we have any intangible acquisition amortization.
Michael Hsing, CEO
Okay. The second part is how it affected our gross margins with the current supply shortages. All these new products have gained market shares as greenfield products over the last couple of years. These have higher margins. Our customers provide us with long-term forecasts, and we honor those. We can absorb some of the costs related to these higher-margin projects. During this time, we value our customer relationships and we don't gouge prices.
Genevieve Cunningham, Moderator
All right. Our next question is from Ross Seymore of Deutsche Bank. Ross, your line is now open.
Ross Seymore, Analyst
Thanks for letting me ask a question. Congrats on continued strong reports and guides. One question on an end market. The communications side, Bernie or Michael, you guys said that was up because of infrastructure. That's been a really choppy market for you guys between the infrastructure side going on and off and then the access side. Can you just talk a little bit more about what you meant by the infrastructure side? And is that the start of something that's going to continue, or should you expect that segment to continue to be lumpy going forward?
Michael Hsing, CEO
Well, Ross, you know that we're transitioning from Wi-Fi routers to more in real infrastructures like data centers or communication between the data centers and the switchers, and even towers. In the last year, our customers have pulled in a lot of revenues. This time, we see all the other things going like 5Gs and commercial Wi-Fi systems, and we play a critical role in these areas. We see the expansions continuing in the next few quarters.
Bernie Blegen, CFO
Yes. I think we remain very optimistic about our long-term positioning within the communication sector, particularly infrastructure as it relates to 5G. However, we have not yet reached a constant investment cadence on the part of the carriers in either Europe or North America. As such, we expect that as this gains momentum and becomes more predictable, we are very well positioned to participate in that.
Ross Seymore, Analyst
Thanks for that color. I guess as my follow-up, seasonality versus cyclicality and/or supply-driven moves. Obviously, your fourth quarter has guided a bit better than traditional seasonality, but how are you thinking about that as we go into next year and beyond? Is it mainly going to be driven by the product cycles you have in short supply in aggregate? So those would be big tailwinds, or do you believe seasonality is going to become a framework that investors should consider as we go into 2022?
Michael Hsing, CEO
Well, Ross, this market is exceptionally strong, and there's a lot of demand everywhere. So we do have some delinquency issues, but we are facing delinquency for many quarters now. However, I believe we still have some seasonality in the fourth quarters because of the holidays. The demand is still very strong, and we are just cautious in our guidance.
Ross Seymore, Analyst
And just to add to that, what we are continuing to do is invest and expand our capacity because we do believe that this robust demand that we are experiencing will continue, and we want to be able to participate and optimize to the best of our ability this growth opportunity.
Michael Hsing, CEO
Yes, let me clarify the shortages. These shortages refer to a few thousand products and some issues we cannot meet. We don't face fab capacity issues. We face mixed issues on certain products, and as we transfer to different fabs, it takes time to qualify them.
Ross Seymore, Analyst
Got it. Thanks, guys.
Genevieve Cunningham, Moderator
Our next question is from Alex Vecchi of William Blair. Alex, your line is now open.
Alex Vecchi, Analyst
Hey, guys. Congratulations on the strong results. Maybe just to piggyback on Ross' question a little bit with seasonality. Bernie, can you give a little color on how we should think about the sequential growth rate by end market for Q4 in terms of maybe strongest end market to weakest?
Bernie Blegen, CFO
Sure. When you look at Q4, I think that the two primary drivers are going to be computing and continuation of automotive. You would normally expect a slight downturn in consumer. Many of the trend lines we are familiar with are continuing and ongoing, but the amplitude might be a little different from what the traditional seasonality has been.
Alex Vecchi, Analyst
Great. That's helpful. And then similarly, I think on the communications line as well, over the last couple of quarters, I believe you pointed to ramp up to that Tier 2 5G OEMs. How should we be thinking about the opportunity eventually next year to crack into a Tier 1, or just generally, how do you think about your positioning there geographically?
Michael Hsing, CEO
Yes. We are designing in all Tier 1s now. We are still small in these growing market segments. As you know, we don't have anything in 4G, and we expect to be significant players in there.
Alex Vecchi, Analyst
Okay, that’s helpful. With that, I'll go back in queue.
Michael Hsing, CEO
Okay.
Genevieve Cunningham, Moderator
Our next question is from Quinn Bolton of Needham. Quinn, your line is now open.
Quinn Bolton, Analyst
Hi guys. Let me offer my congratulations. Michael or Bernie, I guess I wanted to -- I know there have been a lot of disruptions in Southeast Asia, more on the package and test side. Wondering if you could just say whether or not you have any exposure to Malaysia subcontractors and whether that affected your ability to ship or receive products here in the third quarter or in the fourth quarter looking forward?
Michael Hsing, CEO
Yes. There's not so much that affected it. Maybe some products, but we control a lot of our own package technologies. We always qualify in different locations. So with the Southeast Asia problems, we managed it reasonably well. We didn't have much of an issue.
Bernie Blegen, CFO
Correct, in either Q3 or our outlook for Q4.
Michael Hsing, CEO
Yes.
Quinn Bolton, Analyst
Got it. My second question just on the supply chain. It sounds like from your comments, you're not seeing some of the fab constraints that you'd seen earlier. And inventory increased by $30 million sequentially. I guess my question is, as that capacity comes online, as you ramp inventory on hand, do you think that could lead to an acceleration in your ability to meet former delinquencies and see revenue growth rate potentially accelerate as you meet some of those delinquencies, or does it really all come down to that product mix of what customers are demanding versus what you have in inventory that you see that mismatch potentially continuing for several quarters?
Michael Hsing, CEO
Yes, to answer your question, as of today, absolutely. We have much more we can fulfill now. With the shortages and the new product adoptions, we ramped up much faster than expected. We have normal out-of-forecast orders that we could not fulfill, but our customers are understanding. As of today, we have blue skies. But that does not mean we are regulators, so I can't forecast it.
Bernie Blegen, CFO
Just to add, it's a balancing act because for some of the more mature products, we have developed markets and predictable growth in the current market. However, we're focused on making sure that these new product introductions are successful, as that represents the future growth opportunities for us.
Quinn Bolton, Analyst
Got it. Can I squeeze one last one in? Do you guys have any meaningful exposure to Chromebooks? And is that a share gain opportunity as you look into 2022? Thank you.
Michael Hsing, CEO
Yes, we have some exposure. If we have a local product, we might as well make them and go design everywhere.
Bernie Blegen, CFO
Yes. Chromebooks are unique because while they're considered a lower-priced category, they depend on good processing power and access to the cloud. Our power management solution is very key here, and that helps us maintain a high value for Chromebooks.
Michael Hsing, CEO
As I said earlier, as our technologies mature, we might as well approach markets we’re currently not in.
Genevieve Cunningham, Moderator
Our next question is from William Stein of Truist. William, your line is now open.
William Stein, Analyst
Great. Thanks for taking my question. Congrats on the great results and outlook. I want to ask one question about supply chain stuff and one about long-term growth. First, on the supply chain, it seems -- certainly, if we look not just at your business but across semiconductors, that customers have been in sort of freak-out expedite mode for quite some time. I wonder if you could give us a sense as to whether that has abated at all. Did the level or breadth of expedite requests change meaningfully in the quarter? Is it getting hotter or colder in any end market with regard to this urgency of expedites and pull-ins and upsides and all that activity we've heard about? And then again, I have a long-term growth question.
Michael Hsing, CEO
Yes. I wish that they would come down a little, but it has stayed exactly the same as the last quarter and the quarter before.
William Stein, Analyst
Okay. So the long-term growth question, Michael, we've discussed this many times, but we're aware that there's this long-term potential to transition to more of a solutions provider with modules relative to your traditional semiconductor device business. Can you talk about the trajectory of growth of the modules business? An update on perhaps percent of revenues today relative to a quarter ago and where you think it could go over time? Thank you.
Michael Hsing, CEO
Yes. Our homegrown modules are part of our strategy. There are a lot of technicalities involved in delivering the end product. Currently, our module growth is much faster than traditional semiconductor sales, but the overall volume is still very small compared to total revenues. We are trying different approaches, such as launching our website and utilizing e-commerce. These are performing well. We know that we need to gain knowledge and sales channels to have companies adopt our technologies.
Bernie Blegen, CFO
If I can just remind you, William, we touched on this last quarter. We indicated that we were trying to source different technologies through either IP acquisitions or talent acquisitions that are complementary to our business. This would accelerate our ability to be a solutions provider for our customers over the next several years.
Michael Hsing, CEO
Yes. We have significant knowledge and value to provide. Currently, we sell pieces of silicon averaging well below $1. We should sell our solutions at much more than $1, such as $5, $6, or even $10. Our customers will truly appreciate it since they don't need to design from scratch.
Genevieve Cunningham, Moderator
Our next question is from Rick Schafer of Oppenheimer. Rick, your line is now open.
Wei Mok, Analyst
Hi. Good afternoon. This is Wei Mok on the call for Rick Schafer. I just wanted to echo congrats on the results. My first question is in regards to auto. It's pretty much well known that the market is supply constrained, though you guys are still growing nearly 90% this year. With industry reports showing vehicle unit production improving in 2022, how should we think about your auto business as we look into 2022?
Michael Hsing, CEO
It's a very rosy outlook right now. However, we are still quite small. There's no reason we would not grow, even with any downturns. Our addressable market is over $6 billion; that’s a conservative figure. As we introduce more products, especially in ADAS and the EV segment, we see great opportunities for future growth.
Bernie Blegen, CFO
Just to follow up regarding automotive, we have been securing system-level design wins in features such as ADAS, regenerative braking systems, and external lighting. These solutions offer us much higher revenue per vehicle, ranging from $60 to $100 per vehicle, which is exciting for our solution strategy's implementation in different end markets.
Wei Mok, Analyst
Got it. Great. Thanks for that. As for my second question, it's regarding the console. You highlighted consumer being down in Q4. Is this more of a reflection of normal seasonality, or are you seeing any supply constraints impacting consoles? Thanks.
Michael Hsing, CEO
Well, Q3 on the consumer side did not stand out. I think at our customer side, they have too much inventory for cellphones, which has affected us. The cellphones, particularly in China, were expecting gains in market share, but they didn't quite achieve that, leading to excess inventory.
Bernie Blegen, CFO
We tried to narrow that definition of the dip. The decline is really stemming from fast chargers in handsets rather than anything more broadly affecting the consumer market.
Michael Hsing, CEO
We haven't had much exposure in handsets anyway, and I didn't favor that either, but it turned out to be fine. The technology has been positively received; it’s just that the expected demand didn't come to fruition.
Genevieve Cunningham, Moderator
Our next question is from Kevin Garrigan of Rosenblatt. Kevin, your line is now open.
Hans Mosesmann, Analyst
This is Hans for Kevin. Congrats. A couple of questions. Along the lines of inventory, I think AMD, Micron on the PC side of things, and Texas Instruments broadly have suggested that customers are changing their behavior a bit in terms of how they take in components in a supply-constrained environment. So rather than just take everything they can get, they're being more selective. Is that something you guys are seeing? And is that unusual if you are seeing that? Thanks.
Michael Hsing, CEO
We are too small, and these are massive players. We don't have the luxury of being selective in market segments; we focus on long-term strategies.
Bernie Blegen, CFO
To succinctly respond, we haven't seen any change in ordering patterns or delivery schedules and really don't have an opinion on what the broader market is experiencing.
Hans Mosesmann, Analyst
Fair enough. My last question is about your visibility regarding when you can reach that 180 to 200 days of inventory. Has that timeline changed? Is it by the end of next year or 2023?
Michael Hsing, CEO
I think the end of next year would be a reasonable target. If the market continues strong, we hope to catch up by then.
Hans Mosesmann, Analyst
Is that a push-out or a pull-in from last quarter?
Bernie Blegen, CFO
I'm sorry?
Michael Hsing, CEO
As I mentioned earlier, we have a delinquent situation, and we’re witnessing more delinquencies than customer push-outs.
Bernie Blegen, CFO
I think the key is that even with the heightened demand, we successfully increased inventory this quarter, which shows our ability to balance customer demands with building inventory flexibility.
Hans Mosesmann, Analyst
Great. Thank you.
Genevieve Cunningham, Moderator
Next question is from Tore Svanberg of Stifel. Tore, your line is now open.
Tore Svanberg, Analyst
Yes. Thank you. I just had a few follow-ups. First of all, Bernie, the gross margin guidance for Q4 does not include any more litigation impact, right?
Bernie Blegen, CFO
That is correct.
Tore Svanberg, Analyst
Okay, great. So the other question is, a lot of your competitors are discrete companies, and they're probably allocating their products everywhere right now, which I assume means you're gaining share. Can you just talk a little bit to the stickiness of that? I assume once they go with an integrated solution, they’re not going to go back.
Michael Hsing, CEO
That's very true. Once they've experienced a simple, easy solution, it's difficult for them to return to previous practices. The high-end products we focus on retain customer loyalty, and they pay extra for it. Our customers have adapted their design habits considerably, which is a significant advantage for us.
Tore Svanberg, Analyst
Got it. Just one last question. Michael, in the past, you've discussed getting the side dishes with respect to servers and automotive, but eventually, you'll be going for the main course. Should we expect those two segments to see some main course revenue in 2022?
Michael Hsing, CEO
Yes, yes. We are still eating crumbs, but we eat a lot of crumbs. We are small fish aiming for substantial meals. We have reference designs with Intel and OEMs as we gain traction with more significant projects. Our focus on VR14s and VR13.5 is benefitting us significantly.
Genevieve Cunningham, Moderator
As there are no further questions, I would like to turn the webinar back over to Bernie.
Bernie Blegen, CFO
I'd like to thank you all for joining us for this conference call, and we look forward to talking to you again during the fourth quarter conference call, which will likely be in early February. With that, thank you, and have a nice day.
Michael Hsing, CEO
Okay. Goodbye.