Earnings Call Transcript - MPWR Q1 2023

Operator, Operator

Welcome, everyone, to the MPS' First Quarter 2023 Earnings Webinar. My name is Jennifer 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. In the course of today's conference call, we will make forward-looking statements and projections that involve risk and uncertainty, which could cause results to differ materially from management's current views and expectations. Please refer to the safe harbor statement contained in the earnings release published today. Risks, uncertainties and other factors that could cause actual results to differ are identified in the safe harbor statements contained in the Q1 earnings release and in our SEC filings, including our Form 10-K filed on February 24, 2023, 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&D and SG&A expense, operating income, other income, income before income taxes, 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 Q1 2023 earnings release, which we have furnished to the SEC and is currently available 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'd like to turn the call over to Bernie Blegen.

Bernie Blegen, CFO

Thanks, Jen. MPS' first quarter revenue of $451.1 million came in about as expected, 19.4% higher than the first quarter of 2022 or 1.9% lower than revenue reported in the fourth quarter of 2022. Our results for the quarter were mixed with weaker quarter-to-quarter demand in our enterprise data and industrial markets, overshadowing improvements in consumer and automotive. Let's take a quick look at our first quarter 2023 revenue by market. First quarter 2023 consumer revenue of $63.4 million increased 19.5% from the fourth quarter of 2022. First quarter 2023 revenue was down 20.8% year-over-year. Consumer revenue represented 14.8% of our first quarter 2023 revenue compared with a 21.2% contribution in the first quarter of 2022. First quarter 2023 automotive revenue of $105.3 million increased $8.0 million or 8.2% from the fourth quarter of 2022. This sequential revenue increase was primarily due to continued acceptance of our highly integrated solutions for advanced driver assistance systems, the digital cockpit and lighting applications. First quarter 2023 revenue was up 93.1% year-over-year. Automotive revenue represented 23.3% of MPS' first quarter 2023 revenue compared with 14.4% in the first quarter of 2022. First quarter 2023 Communications revenue of $67.9 million rose $3.6 million or 5.6% from the fourth quarter of 2022. This quarter-over-quarter increase primarily reflected a modest revenue improvement in 5G infrastructure. First quarter 2023 revenue was up 22.2% year-over-year. Communications revenue represented 15.1% of MPS' first quarter 2023 revenue compared with 14.7% in the first quarter of 2022. In our storage and computing market, first quarter 2023 revenue of $119.8 million was essentially flat with revenue recorded in the fourth quarter of 2022, as declining storage revenue was offset by higher notebook sales. First quarter 2023 revenue was up 24.1% year-over-year. Storage and computing revenue represented 26.6% of MPS' first quarter 2023 revenue compared with 25.6% in the first quarter of 2022. First quarter 2023 Industrial revenue of $47.5 million decreased $8.6 million or 15.3% from the fourth quarter of 2022. This quarter-over-quarter decrease was due to lower security and power source revenue. First quarter 2023 Industrial revenue was down 2.2% year-over-year. Industrial revenue represented 10.5% of our first quarter 2023 revenue compared with 12.9% in the first quarter of 2022. In Enterprise Data, first quarter 2023 revenue of $47.2 million decreased $21.3 million or 31.1% from the fourth quarter of 2022 due to broad-based weakness in data center spending. First quarter 2023 revenue was up 10.9% year-over-year. Enterprise data revenue represented 10.5% of MPS' first quarter 2023 revenue compared with 11.2% in the first quarter of 2022. I'd like to share some general business observations. During our two most recent earnings calls, we highlighted that customers were becoming more concerned with near-term business conditions and that ordering patterns might oscillate. This behavior continued through the first quarter of 2023. However, we do see order acceleration for products related to artificial intelligence, autonomous driving, and power modules, and our customer engagement and design win momentum remains strong across all of our markets. Regarding operating expenses, we continue to invest in our operations to support long-term growth. In response to customer concerns, we are expanding and geographically diversifying both our global production, operations and our R&D activities. In summary, we have strong customer engagement, design win momentum and are continuing to invest for the long term, even though timing of the revenue ramp from our customers remains uncertain. Moving now to a few comments on gross margin. GAAP gross margin was 57.4% and 80 basis points lower than the fourth quarter of 2022 and 60 basis points lower than the first quarter of 2022. Our GAAP operating income was $124.3 million compared with $136.9 million reported in the fourth quarter of 2022. For the first quarter of 2023, non-GAAP gross margin was 57.7%, 80 basis points lower than the fourth quarter of 2022 and 60 basis points lower than the first quarter of 2022. This downward pressure on gross margin is expected to continue near term as we work through higher value inventory built up during the supply-demand imbalance following the pandemic. Our non-GAAP operating income was $164.1 million compared to $174.1 million reported in the fourth quarter of 2022. Let's review our operating expenses. Our GAAP operating expenses were $134.5 million in the first quarter of 2023 compared with $130.9 million in the fourth quarter of 2022. Our non-GAAP first quarter 2023 operating expenses were $96.0 million up from $94.8 million reported in the fourth quarter of 2022. The differences between GAAP and non-GAAP operating expenses for the quarters discussed here are primarily stock compensation expense and income or loss from an unfunded deferred compensation plan. For the first quarter of 2023, total stock compensation expense, including approximately $1.1 million charge to cost of goods sold, was $37.0 million compared to $35.3 million reported in the fourth quarter of 2022. Switching to the bottom line. First quarter 2023 GAAP net income was $109.8 million or $2.26 per fully diluted share compared with $119.1 million or $2.45 per fully diluted share in the fourth quarter of 2022. First quarter 2023 non-GAAP net income was $146 million or $3.00 per fully diluted share compared with $154 million or $3.17 per fully diluted share in the fourth quarter of 2022. Fully diluted shares outstanding at the end of Q1 2023 were $48.7 million. Now let's look at the balance sheet. Cash, cash equivalents and investments were $919.1 million at the end of the first quarter of 2023 compared to $739.6 million at the end of the fourth quarter of 2022. For the quarter, MPS generated operating cash flow of about $218.8 million compared with operating cash flow of $52.2 million in the fourth quarter of 2022. First quarter 2023 capital spending totaled $8.9 million. Accounts receivable ended the first quarter of 2023 at $184.3 million or 37 days of sales outstanding, up 1 day from 36 days at the end of the fourth quarter of 2022. Our internal inventories at the end of the first quarter of 2023 were $430.8 million, down from $447.3 million at the end of the fourth quarter of 2022. Days of inventory decreased to 204 days at the end of Q1 2023 compared with 212 days at the end of fourth quarter of 2022. Comparing current inventory levels with the following quarter's projected revenue, you can see days of inventory decreased to 203 days at the end of the first quarter of 2023, from 212 days at the end of the fourth quarter of 2022. I would now like to turn to our outlook for the second quarter of 2023. We are forecasting Q2 revenue in the range of $430 million to $450 million. We also expect the following: GAAP gross margin in the range of 55.9% to 56.5%. Non-GAAP gross margin in the range of 56.2% to 56.8%. GAAP R&D and SG&A expenses between $132.5 million and $136.5 million. GAAP R&D and SG&A expenses to be in the range of $94.9 million to $96.9 million. This estimate excludes stock compensation expense, but includes litigation expense. Total stock-based compensation expense of $38.8 million to $40.8 million, including approximately $1.2 million that would be charged to cost of goods sold. Interest and other income is expected to range from $3.8 million to $4.2 million before foreign exchange gains or losses. Fully diluted shares to be in the range of 48.6 million to 49.0 million shares. In conclusion, while we remain cautious about near-term business conditions, MPS will continue to focus on business development and investing in infrastructure as necessary to support our long-term growth. I'll now open the webinar up for questions.

Tore Svanberg, Analyst

I was hoping you could elaborate a little bit more, Bernie, on your comment about the business conditions. Because it sounds like the design win momentum is still very strong. The activity is very strong, but you also sort of added there was uncertainty in certain ramps. So maybe you could elaborate a little bit on that, especially when thinking about the second half which seems to be a period where the industry could potentially recover.

Michael Hsing, CEO

Let me respond to your question first. When looking at various industries, our server computing segment, which includes industrial servers and AI products, accounts for about 10% of MPS revenue. We have witnessed significant growth in this area over the past two or three years. In the automotive sector, it represents around 23% of our business. Overall, AI and automotive combined make up more than 30%. Despite experiencing strong demand across the board, particularly outside of AI and automotive, we have seen some design wins that took shape over the last four to five years ramp up recently. The reason for our inventory levels is that we expanded our capacities and grew much faster than average. To address your question directly, our customers are currently pausing on their product ramps due to uncertainty about new products, causing delays. This moment is not concerning for us because the last two to three years have seen unsustainable hypergrowth of 30% to 40% year-over-year, which could jeopardize the company. I believe we are returning to a more normal growth period and will navigate the global market uncertainties as we have in the past. Bernie, perhaps you can provide additional details.

Bernie Blegen, CFO

And I think Michael has really laid out a very compelling case as far as the growth that we've experienced over the last 3 years, and also identifying that the automotive market remains solidly intact, but particularly in Enterprise Data with the exception of AI that we are seeing lag in ordering patterns there and general weakness in our other markets. So I think the thing to reinforce here is that the business model here remains intact. We've built MPS around sustainable growth over the long haul. And right now, we're looking at a quarter where the end customer demand is not picking up as well as we might have anticipated a quarter or two ago. But again, the business model is intact.

Tore Svanberg, Analyst

That's a valuable insight. As a follow-up, you mentioned that gross margin is declining slightly due to higher-value inventory. Could you clarify how long you expect this trend to continue and provide any estimates? I would assume you might reach around 55% to 56% gross margin. Any additional details on the duration of this lower gross margin would be appreciated.

Bernie Blegen, CFO

Sure. And the good news here is that cycle times and pricing both in the fab, the assembly houses are coming down. And so we'll be able to participate in the lower cost after we burn down the inventory, which is currently at about 203, 204 days. So I would expect that we'll see a downward pressure on margins through Q2 and Q3, and then perhaps a moderation leveling in around Q4.

Michael Hsing, CEO

Yes. As we enter a downturn, we recognize that some segments will grow in MPS due to our diverse range of companies, while other areas will remain stable. Generally, consumers continue to receive products, and some categories may rebound in the second year. My main point is about gross margins. Historically, when the industry slows down, MPS tends to lower prices to capture more of the consumer market. This strategy can yield results six months later when we actively pursue those products; these have fast design cycles, and we can see revenue increases in about six months. Our focus is less on short-term gross margins and more on long-term margins, which have remained consistent. Over the past decade, we've committed to these models, and in the consumer segment, we are placing priority on short-term growth to sustain overall expansion.

Nathaniel Bolton, Analyst

I guess I wanted to follow up on Tore's question. Really, Michael and Bernie, as you look into the second half of the year, that's normally a seasonally stronger period for the company. Obviously, it feels like there are lots of puts and takes, lots of uncertainty, customers delaying product ramps. But can you give us any sense how you're thinking about the second half of the year? Will you see sort of a normal seasonal uptick in September? Or are you thinking September could be flattish with kind of the 1Q, 2Q run rate? Any additional color would be helpful just to try to think about the second half.

Bernie Blegen, CFO

Sure. I think that right now, normal seasonality still applies, but in our case, it’s a little more muted because so much of our growth in the business is attached to those new product introductions being made by our customers. So if we look in Enterprise Data, in which our major customers or the products that we’re supporting have had product delays. And when you look at other aspects of our business, for example, Communications, that's still what I'd refer to as lumpy. It's not necessarily trending in a seasonal pattern. So I think that your comment is very balanced and all I'm tilting is to the new product introductions being delayed probably being a larger factor than just seasonality.

Michael Hsing, CEO

Yes, I think we can no longer consider it a typical seasonality. We've experienced changes in the past, and some segments are growing significantly, while others hit a low point last Q3 and Q4, particularly in the notebook area. Now we're seeing a revival. MPS has secured orders for design reference solutions, and we have power solutions in place. However, for the second half, we don't have a clear outlook for most of our other business areas, except for AI and automotive. That's the situation in the short term.

Nathaniel Bolton, Analyst

Understood. I wanted to follow up on the Enterprise Data segment. Obviously, a weaker result and sounds like some of the product or customer delays are sort of focused in that segment. Do you still think as the new server cycle ramps that you can get your share of the Vcore power management market towards 20 percentage? Is that still the right opportunity to be thinking about longer term, even if some of those customer programs have pushed out by somewhat?

Michael Hsing, CEO

Absolutely, I can say that confidently. We see that these projects have not fully ramped up yet. In the data centers, as you all know, the growth has dramatically slowed down. It's unclear if there was overexpansion in the last couple of years leading to this pause. We lack a clear view, but based on what we observed from last quarter to the first quarter and now, it seems there has been a slowdown.

Bernie Blegen, CFO

If I can add to that, I know you’re focused on the short term for the second half of the year. However, in the GPU space for artificial intelligence, we hold a strong market share position. Looking ahead to the next generation, we are well-positioned to capitalize on the upcoming GPUs. We are still in the early stages of leveraging our position and expanding our share.

Michael Hsing, CEO

Yes, I didn't include that part. The GPU aspect is on the AI side, where we have a current design win as well as another upcoming design, with products expected to launch by the end of this year or next year. These MPS products will ramp up accordingly. Earlier, I mentioned that the overall CPU power in data centers is significant, but we still hold only a small market share, possibly just reaching double digits. Additionally, we are in the process of transitioning from VR13 to VR14, which is not yet completed. We have secured many design wins in VR14, and we anticipate these will generate revenue.

Matthew Ramsay, Analyst

I wanted to ask a two-part question about gross margin. You have transitioned from a steady range of 54 to 56, gaining around 10 to 20 basis points each quarter, which was quite consistent. Then, during the period of supply-demand imbalance, we saw an increase to about 58, and now we've returned to a lower level, which you've discussed in the short term. Looking ahead over the next 2 to 3 years, considering your aggressive growth strategy and the potential for new design wins and increased content, could you provide clarity on the long-term gross margin? Has anything changed in that regard, and what might the new normal look like? Additionally, have you noticed any specific price pressures in any markets as some competitors begin to have more supply?

Michael Hsing, CEO

Yes, let me address the latter part of your question first. In terms of high volume, our customers tend to work with multiple suppliers, which usually leads to price pressure, except for the past couple of years during which shipping challenges limited options mainly to the MPS. Many companies faced difficulties with shipments and MPS, while we experienced less impact. Currently, we are seeing higher volumes as anticipated in recent years, and I recall that we haven’t discussed that extensively. We also introduced new technology that significantly reduces costs, which will lead to increased competition. To address your question, I mentioned that I am less concerned about our gross margin at the moment; however, we are still operating within our models. Although we will see a decline in gross margin, it remains manageable in the long-term outlook. Looking ahead two to three years, the MPS business remains solid, and we are concentrating on high-value areas. We are shifting from IC solutions to sell solutions, maintaining this focus, which generates more value and higher gross margins.

Bernie Blegen, CFO

And I think just to polish off the comment there is that as far as our model, we've been operating over the last several years between 55% and approaching 60% as far as a non-GAAP gross margin. And as we introduce these higher-value products, they tend to have higher margins. And what that allows us to do is then manage the mix of business such that we stay within our model. So while we sort of anticipated in the near term downward pressure with a flattening here in the next 3 to 4 quarters, we'll continue to look to be opportunistic and managing gross margin to accelerate revenue growth.

Matthew Ramsay, Analyst

Got it. As my follow-up, and I apologize for this being a near-term question, but with all the different end market volatility. Bernie, if you could help us on your guidance by segment, just the revenue trends that you guys see into the June quarter, that would be great.

Bernie Blegen, CFO

Sure. I think that we said earlier in the call...

Michael Hsing, CEO

It's fair to ask a short-term question because this is a very uncertain period.

Bernie Blegen, CFO

So I think to sort of make a simple point on it is that automotive continues to be doing very well. And there, it's both the market itself as well as the share gains that we're enjoying. I said earlier that Communications is lumpy and the other areas, including Storage and Compute, Enterprise Data, and Consumer and Industrial are sort of flattish for the near term.

Michael Hsing, CEO

The storage segment in the AI area, particularly in the data center, seems to be somewhat stable. Most of our revenue still comes from servers, as evidenced by the growth we've seen over the past 18 months. AI contributes a smaller percentage to our overall revenue. Additionally, there are changes happening in the memory sector, with a new format starting to ramp up now. This contributes to our somewhat flat performance. The speed of the transition to DDR5 will play a significant role here. We have engaged with all major memory companies and secured design wins. If the ramp-up of DDR5 happens quickly, we will see an increase in that revenue portion, depending on how fast DDR5 adoption accelerates.

Richard Schafer, Analyst

I appreciate all the insights so far. Could I ask about the 48-volt situation before we return to the AI discussion? I recall either Michael or Bernie mentioning your strong market share position there. I'm curious if, considering 2023, you believe you will remain the sole source for H100 this year, especially with your main competitor in 48-volt reportedly facing challenges. Also, I heard you mention Content, so could you provide more details on what Content entails as we move towards more powerful accelerators? Is it similar to the transition from VR13 to VR14 on VCorPower, where you went from around $50 to approximately $70? Lastly, Michael, I'm interested in knowing who else is working on 48-volt power.

Michael Hsing, CEO

Okay. Let me answer my part first, and I'll get in...

Bernie Blegen, CFO

That's more fun part.

Michael Hsing, CEO

The landscape is fine, and while we do see some competition in the game, I believe our products are still the best. As the market segment expands, more competition will emerge. The market is too large for MPS alone, and we welcome other players and collaborations. In fact, that’s exactly what we’re aiming for, as MPS does not dominate the entire market. However, we are eager to maintain a leading position.

Bernie Blegen, CFO

Yes, reinforcing Michael's point, we enjoy a leadership position and expect to maintain it. Competition is crucial for driving technological advancements. Regarding your question about dollar content, we typically assess the CPU market with a dual processor setup, which helps us estimate the average selling price per server. The model is still evolving, with configurations that can include up to 8 GPU boards, making it challenging to pinpoint our dollar content at this stage. We are in the early phases of this model ramping up, and I believe we will have sufficient experience in about 2 to 3 quarters to provide a more precise understanding of dollar content, which is significantly higher than what we're currently seeing with CPUs.

Richard Schafer, Analyst

And for my follow-up, I'd love to ask you about 5G band. I know you guys have said in the past you're selling to the big 3 RAN equipment OEMs. I'm just curious how you would describe the ramp there in terms of content, in terms of share? And what I am trying to do is get a sense of how big 5G is now versus how big it could be for you guys. And to something you mentioned earlier, Bernie, I'm just really curious here, could the ramp in 5G sort of smooth some of that lumpiness you described in your comm segment?

Bernie Blegen, CFO

Yes. If I was to draw a comparison of our experience with Enterprise Data where we started out with low dollar content and then graduated up the value chain including power management. We're probably about 3 to 4 years behind in the Communications market, where we're still focusing on low dollar content for like point of load knee fuse. Now where this is about to get very exciting is we are getting adoptions for later designs that include our power management for the processors. So at this stage, we're sort of moving with the market. Again, as an early entrant. But yes, long term, I do think you're going to see a similar growth profile as what we expect to have with enterprise data.

Michael Hsing, CEO

Yes, I'm emphasizing that MPS is a small company, but we are gaining recognition. We are engaging with key customers in the 5G sector, which includes only a select few companies at the moment. We are currently in the process of finalizing contracts, and it’s only a matter of time before we see progress.

Ross Seymore, Analyst

Can you hear me?

Michael Hsing, CEO

We have a high inventory, yes.

Ross Seymore, Analyst

How about the channel inventory. We've heard a bunch of companies talk about the channel coming down, and that's a headwind to revenue growth. I know you guys proactively manage that. So you put it on your own balance sheet, but what's the channel looking like?

Michael Hsing, CEO

It's also on the high side.

Bernie Blegen, CFO

Yes. About 3 quarters ago, we saw an increase in channel inventories, and they've remained at about that same level. So there isn't any real new news as far as the sell-through characteristics.

Ross Seymore, Analyst

Is that something that's weighing against your revenue right now? Or are you comfortable running at that relatively higher level?

Michael Hsing, CEO

No, we want to go lower and we want to lower and particularly in the first quarters and a lot of customer threatens and get much higher volumes, okay? That's why we shipped and now they have a break. And so as a result, inventory didn't decrease that much in the channel.

Ross Seymore, Analyst

So it went down on your books more so than in the channel?

Bernie Blegen, CFO

Yes. Another aspect to consider is that the inventory in the channel is influenced by the lead times of our end customers. As mentioned in our prepared remarks, we are experiencing an unusual demand pattern where we see acceleration in three areas regarding ordering. However, this is accompanied by an expectation for very short lead times. As Michael mentioned earlier, the channel has built up in anticipation that customers would see sales gains from the new products, but those have been delayed, leaving us in this situation. We will continue to manage the channel as we always have, but currently, it is at an elevated level.

Ross Seymore, Analyst

Got it. And then 1 on the gross margin for you, Bernie. When you talked about the headwinds for it, we see this across the board. So I don't think it's anything particularly different for Monolithic. But the 1 thing you didn't mention was mix. I get that you're carrying higher cost inventory, and it takes a while to flush through. But as you go opportunistically, into the consumer market, is that rising as a percentage of sales, something that is also weighing against gross margins? And if so, when do you think that will kind of normalize as a percentage of sales, if not decrease?

Michael Hsing, CEO

Yes, you can see it as normal because the consumer market hasn't emerged yet. We significantly reduced our inventory now, primarily focusing on high-value items.

William Stein, Analyst

Regarding something you just spoke about a moment ago, you spoke about elevated inventory and push outs of projects. I think obsolescence risk is relatively small for Monolithic, but maybe you can reassure us on that matter.

Bernie Blegen, CFO

Absolutely, that's a very helpful question. Looking at our history, we've never experienced a significant inventory write-off. A big part of this is because our products have a long market life and shelf life. For instance, in 2019, we built up inventories and were able to benefit when the market rebounded in 2020, especially during the capital infusion from the pandemic. Therefore, we don’t consider the inventory on our balance sheet to be a negative. In fact, when the markets stabilize, particularly in Enterprise Data and Storage and Computing, we believe we are well positioned to take advantage of any uplift.

William Stein, Analyst

Great. And then like to sort of ask a double question about supply and your supply base. Other analog companies have talked about how their foundries are absolutely not cutting cost and they never see it happening, but you've highlighted this trend in your business. Is it because you're on more advanced nodes and so that's just how sort of pricing in that market works? And then maybe you could also comment on the manufacturing plan, both in terms of long-term capacity and geographic diversity.

Michael Hsing, CEO

Yes, we advance our technology every two to three years, and we are consistently reducing costs while utilizing better technologies and achieving improved geometries. Over the last three years, fab costs have increased, but with the geometries and new technologies we implement, we expect to lower costs. Regarding manufacturing, we have anticipated this and announced a new partnership outside of China in Singapore, and we will continue to explore such opportunities. However, currently, there is no U.S. manufacturing for our applications and products; everything is based in Asia, including Korea, Taiwan, and Southeast Asia. We can handle all our module business outside of China.

Operator, Operator

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

Bernie Blegen, CFO

I'd like to thank you all for joining us for this Q1 2023 earnings webinar. I look forward to talking to you again during our second quarter conference call, which would likely be in July. Thank you. Have a nice day.