Earnings Call Transcript - MPWR Q1 2024

Genevieve Cunningham, Moderator

Welcome everyone, to the MPS First Quarter 2024 Earnings Webinar. 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; Bernie Blegen, EVP and CFO; and Tony Balow, VP of Finance. Earlier today, along with our earnings announcement, MPS released written commentary on the results of our operations. Both of these documents can be found on our website. Before we begin, I would like to remind everyone that in the course of today's presentation, we may make forward-looking statements and projections that involve risk and uncertainty. Risks, uncertainties, and other factors that could cause actual results to differ from these forward-looking statements are identified in the safe harbor statements contained in the Q1 earnings release and in our latest SEC filings, including our Form 10-K, which can be found on our website. Our statements are made as of today, and we assume no obligation to update this information. Now I'd like to turn the call over to Bernie.

Bernie Blegen, CFO

Thanks, Gen. We're doing something a little different in today's earnings call. As a detailed recital of performance metrics is included in the company's earnings commentary accompanying the earnings release, I'll use this time to provide just a few comments on our Q1 2024 performance and our outlook before opening the call up to Q&A. Our financial performance improved in the first quarter of 2024 with revenue up both sequentially from Q4 '23 and year-over-year from Q1 '23. Ordering patterns consistently trended upwards through the quarter. Visibility into the second half of 2024, however, is limited and many of our customers remain cautious. Despite this uncertainty around the second half of 2024, customer engagement across all of our end markets remains high, and our design win pipeline continues to grow stronger. Additionally, we are continuing to expand our product portfolio and diversify our supply chain globally. We believe both actions position our company for further growth as the market improves. In summary, we saw consistent improvement through the first quarter, but we continue to be cautious about the second half of 2024 business conditions. Overall, our proven long-term growth strategy remains intact, and we can swiftly adapt to market changes as they occur. I'll now open the webinar up for questions.

Genevieve Cunningham, Moderator

Our first question is from Tore Svanberg of Stifel.

Tore Svanberg, Analyst

Congratulations on this enviable consistency. I have two questions. My first question is on share gains. And historically, Michael, Monolithic Power tends to really accelerate share gains during downturns. I know there's a lot of focus on Enterprise Data right now, which is one-third of your revenue, but can you maybe call out some other verticals or applications where you are seeing more share gains in the current downturn?

Michael R. Hsing, CEO

Clearly, we just wait — if we haven't out of this downturn. You see this, we compare the rest of the industries, we're around 10% up. So that's really a share gain. In terms of other vertical markets, the automotive sector is clearly one. We won many sockets in there. And MPS is still small compared to all these established competitors. In other areas, even the server and notebook segments are gaining shares. Lastly, in the consumer market, as we mentioned about a year ago, we lost some share due to capacity constraints. Now, we have a lot more capacity now, and you will see growth in the near future.

Bernie Blegen, CFO

If I could add one additional comment there, we've had a number of greenfield opportunities that have been waiting to launch in an improved macro environment. So in addition to the end markets that Michael just referenced, I think you'll also see share gains in both communications and industrial.

Tore Svanberg, Analyst

Great. And for my follow-up question specifically on Enterprise Data, which is now one-third of our revenues. There's been chatter lately about lower power management content in next-generation AI data centers due to liquid cooling and other techniques to lower overall power. Is this impacting MPS broadly? Or is this more of a very specific use case in the server power management market?

Michael R. Hsing, CEO

All these cooling systems — the new format or vertical powers, MPS involves all of them. If they transition to those markets, those systems, MPS will gain and grow with it. Is there any other comment? Tony?

Bernie Blegen, CFO

No, I think the point that we've demonstrated, particularly with Enterprise Data, is the ability to leverage up content as we go into higher-value technology. For example, the water-cooled and vertical represent opportunities, not threats. If you look down the line, not too far out, we'll also be going into rack power as well.

Michael R. Hsing, CEO

That's good. Yes, good answer.

Operator, Operator

Our next question is from Quinn Bolton of Needham.

Quinn Bolton, Analyst

I'll add my congratulations on a very steady performance in a challenging macro environment. I guess I wanted to follow up on Tore's question on enterprise data. Lots of your competitors making noise about perhaps gaining share at your largest enterprise data customer. I'm wondering if you could just sort of address your latest thoughts on the competitive landscape in both lateral power and then perhaps looking forward to vertical power? And then I've got a follow-up.

Michael R. Hsing, CEO

Yes. As you may remember, in 2016 we had a power curve versus the CPU computing capabilities versus the power densities. We projected it for 2018 or '19 that would be the crossover point for MPS products. For those common footprints, driver mass couldn't fit into the peripheral powers; that’s around 700 watts. At that time, we projected that the CPU was wrong — it actually turned out to be GPUs. But power densities are power. Peripheral powers reached the limit. I can't comment on our competitors so far; MPS has always wanted to bring the best technologies. We are not champions of volumes; whatever we do, we do it the best, and not just the volumes we ship. When the market normalizes, there will be more solutions on board. A lot of our competitors start to copy our products — so be it. We stick to our MPS model; we will have diversified growth.

Bernie Blegen, CFO

It's important to keep in mind when you look at our history, as Michael just referenced, that we have always won opportunities due to our innovation. As we look at the next generation of GPU or TPU or ASIC products in this high power end market, we're an enabling technology. At the front of the design cycle, we're consulted and integrated, in fact, with the development of the next generation of products. We believe that strategically, yes, there will be competitive influences on the market, but we want to continue to position ourselves as the leader.

Quinn Bolton, Analyst

Got it. Maybe just a quick follow-up. Any comments you guys have on when you think vertical power may go to volume production? Is that something that happens later in '24? Is that not in volume until sometime in 2025? And then the follow-up, Bernie, is you look at the consensus estimates — the Street has modeled up 9% sequential growth in your December quarter. Your typical seasonality, I think, is down 1% to 3%. Wondering if you have any comments as to that sort of a-seasonal pattern out in Q4. I know you're not guiding out that far, but wondering if you could make any comments about that sort of atypical growth.

Michael R. Hsing, CEO

I'll answer the first part. The vertical power is happening now. There are multiple customers launching the vertical power now, and we are shipping those products.

Bernie Blegen, CFO

Yes, and I'll pick up the second part of your question there. Seasonality, particularly as you are exiting a downturn, is hard to predict. What we tried to indicate with our prepared comments is that there are signs of optimism from improved ordering patterns. But how that translates into the second half is hard to predict. Thus far, we have a profile of the guide that we've given for Q2, but that is really as far as the difference between Q3 and Q4 — we see them higher than Q2 perhaps; but between the two of them, flattish.

Michael R. Hsing, CEO

Yes. We see AI probably continue to grow at a very fast rate.

Genevieve Cunningham, Moderator

Our next question is from Rick Schafer of Oppenheimer.

Richard Schafer, Analyst

My congratulations, guys. I just had a couple of questions. The first one is since we're talking about power, and I sort of have a point on server CPU power. Some of the new x86 platforms due out later this year are pushing 500 watts. Is there an expectation... just like the call you made back in 2016, maybe that was a little premature. But is there an expectation that x86 is eventually going to transition to 48-volts still? And if so, where are we in that transition? How far off do you think that is?

Michael R. Hsing, CEO

Yes, okay. Now since you mentioned 2016, I can go back to earlier. In 2014 we were not even — we were outside the door. In 2016, we joined as a guest. The transition from VR 13.5 to 14, during this time, with these new CPU power, we have significant market share. That's not reflected in revenue yet. Once those CPUs are released, we will gain a significant amount of shares.

Richard Schafer, Analyst

Any comment, Michael, on the transition to 48-volt power for x86?

Michael R. Hsing, CEO

That probably — the higher powers are over 700 watts. I think those will transition to vertical powers. The others below that, we believe, are still using traditional rack power that came in and use 12-volt supply.

Richard Schafer, Analyst

Got it. And just as a follow-up, shifting gears a little to auto. I was just curious about your expectations for your auto business this year. Obviously, that market is under a bit of pressure near term. But I believe you guys have been pretty open about some of your material share gains. For instance, with China, within China, ADAS also with some of your top auto customers. You've also got some pretty significant share gains ramping up later this year. I was curious if you could provide any update there.

Michael R. Hsing, CEO

Yes, certainly. We care less about the share gain; it's more about what our revenue expectations are. Of course, we have to prepare all the inventories, that's the only thing we care about. If we're not the best, we will not win those market segments, particularly these new applications and features. So far, we can tell you that this year or at the end of last year, Chinese EV makers are producing a lot more with those features. They increased production somewhere around 5 million to 6 million units, and that's where we see the upside so far.

Genevieve Cunningham, Moderator

Our next question is from Ross Seymore of Deutsche Bank.

Ross Seymore, Analyst

Congratulations on the stability. Just a question on the visibility into the second half. I understand the caution, especially given everything going on in the broader market. But you also said that your bookings are improving, the order rates, the engagements, et cetera. So is the visibility improving? It's just not as good as it used to be? I'm just trying to reconcile the bookings side improving, but the visibility not.

Bernie Blegen, CFO

Sure, Ross. If we can kind of reflect that over the course of the last 6 quarters, the ordering patterns have been well below what we call normal. When we're seeing improvement, it doesn't mean that they have stabilized or that they're predictive as when you have 5 or 6 consecutive quarters of strong ordering patterns. All we're trying to do right now is remain cautiously optimistic.

Tony Balow, VP of Finance

Ross, it's Tony. The only thing I'd probably add on that is really focused on design win engagement, ensuring that pipeline is healthy. It's difficult to call when the market would come back. As Bernie said, it's still pretty choppy. But if we have that strong design win pipeline along with our supply chain diversification, we're set to take advantage when the markets do come back.

Ross Seymore, Analyst

I guess as my one follow-up, a near-term question for you. Any outliers in the growth you're guiding to in the second quarter by end market segments versus the 7% total?

Michael R. Hsing, CEO

No. Outliers mean like AI stuff, yes. As I said earlier, we still see a lot of growth, trying to get all the inventory ready and even see much more upside.

Bernie Blegen, CFO

Yes, if I look sequentially between Q2 and Q1, we do see the continuing demand profile for Enterprise Data. Additionally, we see some contribution from Automotive, but the rest of our end markets are pretty flattish.

Genevieve Cunningham, Moderator

Our next question is from William Stein of Truist.

William Stein, Analyst

Congrats on the good results, and thanks for the change in format. It's a breath of fresh air. I'm hoping you can update us on the progress you pursued to try to diversify your manufacturing geographic footprint — both on the front end and back end? Then I have a follow-up, please.

Tony Balow, VP of Finance

Yes, I'll start, and then I'll let Michael and Bernie pick up. We continue to make progress on the diversification of our supply chain globally. I think that is proceeding as planned, and we are set as customers would ask for that capability so that we have it ready for them right now. No change in the expectation there. So Bernie or Michael, do you want to add anything?

Michael R. Hsing, CEO

Yes. We built all these capacities based on customer demands. A few really demand a lot outside of China. We have more capacity, and that's my comment on that.

William Stein, Analyst

Okay. Let me try a different topic. Some product types that I know have been ramping over a long period of time. One is data converters, which there’s really one very dominant supplier, but you guys have started to get into that area. The other is the modules you make — these are much more complex and have many chips in each one. If you can talk about the recent growth in those newer categories, that would be helpful color.

Michael R. Hsing, CEO

Yes. Let me answer the first one: data converters are a technology we've been developing in the last few years. We have started shipping products and however, there's only 1 or 2 products. We'll be releasing a family of products in less than a year that will meet a more general market. The other topic about the e-commerce modules, we're actually doing well. It’s doing well over $100 million. These are multi-chip modules and all these AI products are included there. I’m sick and tired of selling silicon only; I want to leverage our know-how to sell these power modules as solutions.

Bernie Blegen, CFO

I think we’ve hit on a strategic differentiator between MPS and our competitors; we can offer the most flexible architecture, whether it is delivering a module or silicon die. However the customer wants to build our silicon or modules into their end application, we have the flexibility to do just that.

Genevieve Cunningham, Moderator

Our next question is from Matt Ramsay of Cowen.

Matthew Ramsay, Analyst

I wanted you to talk a little about the content per socket progression you see for the company in the AI business; particularly as the silicon providers driving these platforms make generational transitions. I think there's a little confusion that the big primary player in AI is not just launching 1 product, but 3 different ones that I expect to have slightly different content. You obviously have other customers in AI, not just NVIDIA but others. If you could talk generally, Michael, about what you're seeing from a content perspective, generation to generation there? And maybe Bernie, what are the variables on blended content increases you might see as we move forward?

Michael R. Hsing, CEO

Yes. I can't talk about the — I don't know how our customers, these AI GPU providers, use it. They have different models and a variety of products. As long as we know, they're using IC chipping in general for peripheral power and verticals that exceed 700 watts; over 1,000-watt power. So these are from modules. We have rough ideas about how many modules per CPU, but we don't know exactly.

Bernie Blegen, CFO

To follow up on your second point, it is a very content-rich environment for us. It also includes memory, for example, and the processor in addition.

Michael R. Hsing, CEO

Or even optical.

Bernie Blegen, CFO

It's too early to put limits on content availability. In fact, we're finding new areas to deploy.

Michael R. Hsing, CEO

So far, we just want to manage the growth due to demand from memory, optical, GPU, and CPU powers. This period is truly a growth period.

Matthew Ramsay, Analyst

Got it. That's helpful. I know there's a lot of moving parts. I was going to step back and ask a little bit about gross margin trajectory; it comes up a lot in my conversations. I know you're in that 55% range. I guess, Bernie, what are the puts and takes here? I know there are big customers ramping in enterprise data, and there are variables around that. There's also a mix between your segments and where you're sourcing supply from. There are a lot of variables here. So, I mean, are we at a relative floor in the 55% or slightly above range? What are the variables that could drive the margin back higher?

Bernie Blegen, CFO

This is a pretty simple question. As you know, the range we target is between 55% and 60%. We've demonstrated that during the post-pandemic stimulus, our margin was able to go to the higher end of that limit. Right now, for the last couple of quarters and our guidance here, we've maintained a non-GAAP rate of 55.7%. What will enable us to increase is a change in the mix of business.

Genevieve Cunningham, Moderator

Our next question is from Gary Mobley of Wells Fargo.

Gary Mobley, Analyst

Congrats, and thank you for persistently seeing the expectation. Most of the interesting questions have been asked and answered, but I wanted to touch on pricing trends. I know you don't overlap a great deal with the analog chip market leader. But their pricing approach has been aggressive. Maybe you can speak to the different product groups or business segments that might be affected by that? And generally speak about the pricing environments for your broad array of products.

Michael R. Hsing, CEO

Tony, do you want to?

Tony Balow, VP of Finance

I'll start and let Bernie jump in. What you’ve heard from us in the past is that for us, because we lead on innovation, and we're working on next-generation platforms, we really have a differentiated advantage to our technology. We're probably less susceptible to pricing than some of the segments that are volume-related or more mainstream. So there are lots of reports about pricing right now, but that’s not impacting us, which you can see in our outlook. Bernie will add more on that.

Bernie Blegen, CFO

Part of the issue driving prices is additional capacity in China, as well as additional capacity coming on with a large North American company. But on the cost side, we're very competitive regardless of the end market opportunity.

Michael R. Hsing, CEO

The cost, regardless of the margin, we always have to drive the cost down. I shouldn't give you more than you asked. There’s a lot of activity going on in the near-term market in the next couple of years — AI will truly trickle down to all applications, not just in cars but in all sensors, all these devices, and phones. We see many design ideas now requested from our customers. We didn’t see that at the end of last year or the beginning of this year; recently, we see a lot more. These products will definitely drive the gross margin up.

Gary Mobley, Analyst

Thank you for that comprehensive answer. Last quarter, your distribution inventory; I think you characterized the distribution inventory as being a little bit above the target level. What is it now? Have you been able to work that down to more of a normalized level?

Bernie Blegen, CFO

There are two ways to look at our channel inventory right now. If you keep it narrow to the AI supply chain, we're trying to keep that elevated so that inventory is available on demand. In contrast, for all other end markets, we've seen it coming down nicely.

Genevieve Cunningham, Moderator

Our next question is from Tore Svanberg of Stifel.

Tore Svanberg, Analyst

I just had two quick follow-ups. I'm intrigued by the consumer segment, Michael. I know that's surprising when everyone is talking about AI. This is the lowest percentage it has ever been. But you did talk about gaining shares there in the downturn. Are there any specific applications we should keep an eye on as you start to grow back in the consumer area?

Michael R. Hsing, CEO

Yes. That's a good question. That's — I said earlier that percentage fell into an unhealthy range. We want to have diversified growth, but we neglected our consumers. However, during this period, many of our competitors care less about cost. We did lower the price in the notebook market, and you've probably seen our notebook revenues grow faster than the market growth. These are low-margin products. Looking forward, audio product — a lot related to consumer products — maybe, Tony, you can talk about that.

Tony Balow, VP of Finance

I'll go ahead, and Michael can offer more detail. I'd point you back to what we announced last quarter on the Axign acquisition. We saw an opportunity to participate in the high-end audio market, and MPS's scale, combined with Axign's technology, really offered us a chance to go after customers. We're seeing some traction in that area. The consumer segment has a wide base of potential applications, and we'll continue to pick our shots where we can add value with our innovation.

Michael R. Hsing, CEO

Yes, I can tell you that we will start shipping in Q3 with Axign and MPS together as a bundle.

Tore Svanberg, Analyst

That's exciting. My last question is on communications. It was actually up sequentially this quarter. Everything we hear is that market is still very weak. In your prepared remarks, you said that growth was driven by networks. Can you elaborate a bit on what's going on there? Are you actually starting to see that market turning, or is this just pure share gains?

Bernie Blegen, CFO

It remains a flattish market. I think that quarter-by-quarter, we're going to see infrastructure go up or down. But the full year outlook is that it will probably be flat compared to '23.

Michael R. Hsing, CEO

I'm betting on the communication market; it will trickle down from the speed, and demand for higher speed will trickle down all these segments. We have a lot of design wins in 5Gs or other high speed or Wi-Fi, and we're ready for that.

Tore Svanberg, Analyst

So, Michael, what you mean is AI will trickle down? As that happens, the comm sector will revive?

Michael R. Hsing, CEO

That's right. Yes, that's a no-brainer.

Genevieve Cunningham, Moderator

Our last question is from Melissa Fairbanks of Raymond James.

Melissa Dailey Fairbanks, Analyst

Michael, I love a no-brainer. I love that.

Michael R. Hsing, CEO

Yes, I don’t need my brain to talk about it.

Melissa Dailey Fairbanks, Analyst

I'm adjusting my model accordingly. I know you guys addressed auto earlier, and I know everyone is focused on enterprise data. But I would like to understand better; we're coming up on the model year builds for model year 2025. Where do you feel comfortable guiding the auto revenue from here?

Bernie Blegen, CFO

A lot of the exposure we have with new content is with the EV companies. Michael touched on the opportunity, particularly as it relates to Chinese OEMs where we have a good installed base concerning ADAS or autonomous driving. Those tend not to be as seasonally driven as internal combustion vehicles. While we're seeing some sequential improvement quarter-by-quarter during the year, we're not looking for a hockey stick that used to occur with automotive sales in Q3.

Genevieve Cunningham, Moderator

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 on this conference call and look forward to talking to you again during the second quarter conference call, which will likely be in late July. Thank you. Have a nice day.