Earnings Call Transcript
MONOLITHIC POWER SYSTEMS INC (MPWR)
Earnings Call Transcript - MPWR Q4 2020
Genevieve Cunningham, Moderator
Welcome everyone to the MPS Fourth Quarter 2020 Earnings Webinar. Please note that this webinar is being recorded and will be archived for one year on our Investor Relations page at 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. 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.
Bernie Blegen, CFO
Thanks, Genevieve. For the full year 2020, MPS achieved record revenue of $844.5 million, growing 34.5% from the prior year. This performance represented consistent execution against our strategies and being recognized by more first-tier companies for superior technologies, product quality, and excellent customer service. As we see more high-quality growth opportunities ahead of us, we continue to successfully invest in our infrastructure and capabilities that support that growth. Here are a few highlights that we achieved in 2020: We brought online a new 12-inch fab one year ahead of schedule, allowing for qualified parts to be shipped in Q4 of this year. We will continue to invest in the capacity and diversity of our supply chain with plans to bring up a new 8-inch fab in 2021; Began volume shipments of 48-volt QSMOD technology for AI applications, proving the commercial viability of our leading-edge system solutions in this critically important market; Designed an integrated power management solution for autonomous driving vehicles with shipments beginning to ramp in Q3 of 2020; Launched our ESG website, aggregating all of our environmental, social, and governance values, policies, and practices into one easily accessible location. Customers, employees, and shareholders are now able to fully appreciate MPS's commitment to sustainability, transparency of our business practices, and our ongoing social responsibility.
Genevieve Cunningham, Moderator
Thank you, Bernie. Analysts, I would now like to begin our Q&A session. Our first question is from Matt Ramsay from Cohen. Matt, your line is now open.
Matt Ramsay, Analyst
Thank you very much. Good afternoon and good evening, everyone. Hi, Michael and Bernie. I hope you’re doing well. My first question relates to the supply you are bringing online. You mentioned several different initiatives you have undertaken over the last few quarters to increase supply. Michael, could you describe how much supply you can bring online in the short term compared to the next couple of years to support certain revenue levels?
Michael Hsing, CEO
Well, we stated in a couple of quarters ago, we're building a capacity to meet demand. And so that's our long-term strategy. We'll do that regardless. Just looking back at last year, we pulled a little faster as we anticipated fluctuations in demand. So, as we plan for the long-term future, we are continuing to do so. We still face some delinquency issues.
Matt Ramsay, Analyst
Got it. That makes sense for the long-term. For my follow-up question, which is more focused on the near term, Bernie, could you provide some insights on your expectations? The guidance was significantly above consensus for the March quarter. Perhaps you could discuss it by segment and outline what trends you anticipate as we transition from December to March. Thanks.
Bernie Blegen, CFO
Sure. I think that we saw in 2020 that revenue in both the automotive and industrial sectors were probably most heavily impacted because of the COVID pandemic. In the second half of the year, both of those two markets showed marked improvement and have significant momentum as we go into 2021. But overall, we are broad-based. A lot of the trends that we saw that benefited us in 2020 will likely continue on, with the only exception being communications, which had a strong three quarters and would be difficult to compare against.
Genevieve Cunningham, Moderator
Our next question is from Tore Svanberg from Stifel. Tore, your line is now open.
Tore Svanberg, Analyst
Yes. Thank you. Congratulations on the execution. So far, I think you're the only company that I've seen actually increasing your inventory days. So, congratulations on that too. Last quarter you talked about the size of the delinquencies you had in 2019. Could you give us a ballpark for where they stand right now?
Michael Hsing, CEO
I think in the last quarter we mentioned that we have been dealing with delinquency issues for a few quarters now. This quarter is similar to the last, and we experienced somewhat more issues two quarters ago.
Bernie Blegen, CFO
Yes. And I think that reflects the continued strong demand in the face of industry-wide capacity constraints. We've managed at this level for about the last three to four quarters. I'm not saying we're good at it, but we certainly believe we have it as under control as possible, escalating shipments only based on the needs of the end-user, rather than building inventory in either the channel or on customer shelves. The reason we can meet most of our customers' demands is that we added capacity at the beginning of last year, allowing us to fulfill most of it.
Tore Svanberg, Analyst
Very good. As my follow-up on capacity, you talked about the second 12-inch and also the new 8-inch. I know you typically don't name your foundries on these calls, but could you at least discuss the geographical aspect of where your foundry partners are at this point?
Michael Hsing, CEO
We are currently working to expand beyond China, and we are still evaluating and engaging with a foundry in China as well as one outside of China.
Tore Svanberg, Analyst
Great. Thank you very much. Congrats again.
Bernie Blegen, CFO
Thanks, Tore.
Genevieve Cunningham, Moderator
Our next question is for Ross Seymore from Deutsche Bank. Ross, your line is now open.
Ross Seymore, Analyst
Hi, guys. Can you hear me?
Michael Hsing, CEO
Yes. Loud and clear.
Bernie Blegen, CFO
Hi, Ross.
Ross Seymore, Analyst
Hi there. So congratulations on the growth; especially impressive not only relative to the analog group, but the diversity of it. As you looked at 2020 as a whole, other than the year-over-year comparisons in communications, which I know is difficult. You talked a little bit about expecting to be diverse. If you could just say what some of the idiosyncratic drivers, company-specific things in 2020 would be just kind of by end market, obviously not customer specific.
Bernie Blegen, CFO
Sure. I think that in computing, we had seen a run-up in notebooks in 2018 and 2019. In 2020, there was increased demand in the data center, both for powering servers as well as storage. In the consumer market, we benefited from the once-every-three-year refresh of gaming consoles. We also saw a nice uptick both in home appliances and wearables or mobility. When we look at industrial and automotive, as I said earlier, both of those seemed to be handicapped at the beginning of the year where we had design wins, but we couldn't guarantee what the market conditions were going to be. So, the unit sales of some of the new products we introduced were a little limited, but we showed a lot of strength in the second half of the year.
Ross Seymore, Analyst
And actually, Bernie, I apologize if I misspoke. I was actually referring more to what the drivers are for 2021, which is a similar story, but focusing more on the future than the past.
Michael Hsing, CEO
I think it's a repeat of the same; from 2020 to 2021.
Bernie Blegen, CFO
I'd say the only thing in the first half that gives us a little pause, aside from the communications comparable, is that there's probably going to be some softness in the first half of the year related to computing at the data center. But outside of that, Michael's exactly right.
Ross Seymore, Analyst
Well, maybe that's a good …
Michael Hsing, CEO
The softness is not decreasing. Demand remains, although it's not as strong; it's still slightly higher than we anticipated.
Ross Seymore, Analyst
Got it. And then I guess as my follow-up, a lot of companies are questioning the sustainability of this demand and I know crystal balls are always foggy. But you guys would grow if I just analyze your first quarter guidance, 15%. I know seasonality might not be the best framework, but there seems to be an active debate among investors on whether things are just too hot and there's bound to be a stumble because there's excess ordering and inventory is going to build, etc. How are you guys viewing that kind of supply versus demand balance and the trust in the quality of the orders?
Michael Hsing, CEO
Well, if you look at the past three or four years, we've seen growth from 17% to 25%. In 2019, we only grew 8%, but our design opportunities are still there. We just shifted from 2019 to 2020. In automotive and industrial in the first half of last year, they weren't there, so we saw a catch-up in the second half. In computing, communications, and consumers, the beginning was just stronger than expected. So, I would say it’s slightly more than we expected.
Ross Seymore, Analyst
Okay. Thank you and congrats.
Genevieve Cunningham, Moderator
Our next question is from Rick Schafer from Oppenheimer. Rick, your line is now open.
Rick Schafer, Analyst
Thank you. I want to congratulate the team on their execution this quarter, which I know wasn't easy. I have a couple of questions regarding your main growth areas, starting with the automotive sector. It grew about 15% last year while the SAR was down by about 15%. Thus, it seems like there is potential for around 50% growth this year. Could you discuss what is driving that growth? Is it due to ADAS, body control, or perhaps BMS contributing to increased sales? Additionally, I'm curious if you have any concerns about indirect supply constraints that might limit your growth potential.
Michael Hsing, CEO
Let me talk about your second part first. Growth overall for MPS is limited by our capacities and utilization of total capacity. As you know, we have a few thousand parts, and it's inconceivable we could utilize our entire capacity. For the auto growth, yes, we have ADAS in stock that ramped in the last quarter or so. We are starting to see more customers ramp up; these are high-end products and we are very pleased with it. Other products, from lighting to liftgates to all the other power modules in automotive, are starting to ramp as well. But these are still at the beginning stage.
Bernie Blegen, CFO
And Rick, just one more point is that, I think we've noted that the auto industry is suffering from its own capacity issues or difficulties in maintaining a stable supply chain. However, as I look at our Q1 numbers, it is not directly impacting our demand or our ability to ship.
Michael Hsing, CEO
Yes. We have a small market presence in the auto industry, but these initial ramps are starting to change revenue streams significantly.
Rick Schafer, Analyst
Thanks. I was concerned that secondary supply issues could negatively impact shipments. My second question is about the cloud server; could you provide insights on how the data center ramp for QSMOD looks this year? Is it still a significant factor, or will we see a stronger revenue increase with Sapphire Rapids later this year as it gains traction?
Michael Hsing, CEO
Yes. I can't relate those acronyms with that. I know VR 13.5 is seeing a ramp, and we see revenue growth. Now VR 14, I think, is a next year story.
Rick Schafer, Analyst
Thanks.
Genevieve Cunningham, Moderator
Our next question is from Alex Vecchi from William Blair. Alex, your line is now open.
Alex Vecchi, Analyst
Hi, guys. Congratulations on the impressive quarter from me as well. Maybe Bernie, just on a more housekeeping question, your guidance for gross margin at the midpoint is looking flat quarter-over-quarter. Is that due to end market mix or are you seeing any increasing manufacturing costs weighing on margins? And then, how should we think about that resumption back to the 10 to 20 basis points going forward?
Michael Hsing, CEO
Yes. Obviously, we're seeing significant growth in the consumer segment, which has some slightly lower gross margins. On the other hand, manufacturing costs are going up.
Alex Vecchi, Analyst
Okay. That's helpful. And then just on your inventory days, you guys have talked in the past about the 180 to 200 day target. You've made some improvements quarter-over-quarter. How do we think about getting back to an ideal inventory level in terms of timing?
Michael Hsing, CEO
Well, demand is still strong, which makes it difficult to forecast. We hope to be back to the 180 to 200 days of inventory by the end of the year.
Bernie Blegen, CFO
Yes. If you look at the inventory we hold on our books, or particularly in the channel, it's very lean right now. And we've already discussed delinquencies. We have a lot to catch up on before we can get the model to the 180 to 200-day goal.
Alex Vecchi, Analyst
Understood. That's it for me. I'll pass it along to the next.
Genevieve Cunningham, Moderator
Our next question is from Quinn Bolton from Needham. Quinn, your line is now open.
Quinn Bolton, Analyst
Hey, guys. I will offer my congratulations as well. Just wanted to follow up on Alex's question on the delinquencies and your ability to catch up with them. I mean, how much of the ability to meet those delinquencies is going to come from the new 12-inch fab you brought online in the fourth quarter of last year? Are you able to qualify more parts and other high-volume runners on that fab? Or just kind of curious about your ability to secure more wafer capacity from your five foundry partners in this very tight environment. I guess a lot of companies are saying that they believe supply constraints will remain all year, which makes it sound like getting back to 180 to 200 days is a tall order in calendar 2021.
Bernie Blegen, CFO
Yeah. It's a great question. Thank you for allowing us to provide more context here. With the new fab, we are pleased to report that we were able to qualify parts and ship them. However, that process of qualifying more parts and ensuring meaningful delivery to address our delinquencies is ongoing. It will require investment both in the 12-inch capability as well as this new fab we're bringing online in 2021. So just because we've qualified a few parts and have started the process, it still takes about nine to twelve months before we have the full capability.
Michael Hsing, CEO
In 2020, we increased our capacity by 25%. It's my rough calculations that it was about a 20% to 25% increase last year.
Quinn Bolton, Analyst
I guess my follow-up question was just on the comms space. Obviously, you had three very strong quarters in 2020, and then one of your large customers was no longer able to ship. I believe you may now have a license to resume shipments to that customer. I'm wondering, if that's the case, do you have a better outlook than you might have had 90 days ago for the comms business in 2021?
Michael Hsing, CEO
Absolutely. We have a clearer outlook now as the customer is starting to place orders now.
Bernie Blegen, CFO
Yes. I think there's two forms of this. You identified one customer in particular, and I think we might see that begin to ramp in the second half of this year. More broadly, other opportunities are emerging not just with the top tier but also some second-tier customers in the 5G and infrastructure area.
Quinn Bolton, Analyst
Great. Thank you.
Genevieve Cunningham, Moderator
Our next question is from William Stein from Truist. William, your line is now open.
William Stein, Analyst
Great. Thanks for taking my question. Michael, I'm wondering if you can update us on the longer-term transition to selling more modules. I know that's something that could potentially be very accretive to growth and margins. I think we're still early in that process, but any movement in the quarter that you'd like to highlight?
Michael Hsing, CEO
I think the results are very good amid this high demand. Actually, Bernie can tell you what the ramps are and what has increased.
Bernie Blegen, CFO
Yeah. We had revenue double in 2020, and we exited the year while continuing to increase sequentially quarter-over-quarter. It’s interesting because we thought that it would have more narrow applications, particularly in industrial. In fact, it’s proven to be very broad-based and also sustainable. What I mean by that last point is that we thought that if people wanted unit volumes, they might be more likely to go to components and just buy silicon. In fact, we're seeing a lot of customers going into volume shipments with the modules as well.
Michael Hsing, CEO
Yeah. It's across our product lines. I don't have total numbers for the modules, but it's roughly around $30 million to $40 million now, compared to about half that a year ago.
William Stein, Analyst
Great. And then one other thing I'd like to ask about is your MPS NOW service. Did you see any change in that in the quarter? I know that's something that came online just in time for the work-from-home COVID situation, which I think was very helpful for you. Any change in that and any anticipated change if we hopefully are able to return to offices in the next quarter or two?
Michael Hsing, CEO
Yes. It's been a great help. We set it up right before the pandemic hit. All these software, videos, and working benches were implemented just in time when the pandemic occurred, and it received enormous praise from our customers. In terms of the number of new customers, we’ve increased a few thousand percent due to the videos and virtual bench.
William Stein, Analyst
Great. Thank you.
Genevieve Cunningham, Moderator
Our next question is from Kevin Garrigan from Rosenblatt. Kevin, your line is now open.
Kevin Garrigan, Analyst
Hi, guys. Congrats on the quarter and thanks for taking my question. Just a quick one for me. You alluded to this earlier, but in your automotive segment, you've expanded into several other features of the automobile besides infotainment. Can you talk a little bit about some of your design wins there? Are you seeing more design wins, and how are those progressing?
Michael Hsing, CEO
I believe I could have addressed Rick Schafer's questions more accurately. We don’t have definitive design wins across the board for the BMS. However, to respond to your inquiry, we have made progress from body controls to ADAS and lighting to sensors. We have a diverse range of design wins, and our content expansion has increased from $140 to $150, essentially doubling it. Nonetheless, we are still in the early stages, considering MPS's overall modest revenue.
Bernie Blegen, CFO
On the dollar content, I just want to emphasize that this is not just unit sales, but with the new applications we're bringing on, we go from having $10 of available content to upwards of $40 or $50 for a complete system. So, we're getting both unit and ASP expansion.
Michael Hsing, CEO
We are not talking about relatively small revenues compared to the market opportunity. We address the $6 billion market segments. MPS's product revenue numbers are just over $100 million.
Bernie Blegen, CFO
$110 million.
Kevin Garrigan, Analyst
Okay. Got it. Thank you.
Genevieve Cunningham, Moderator
Our next question is from Ross Seymore from Deutsche Bank. Ross, your line is now open.
Ross Seymore, Analyst
Hey guys, thanks for letting me ask a couple of quick follow-ups. Just two quick ones. First, you mentioned in answering a prior question about your ability to ship to the formerly banned customer. Is that just in the comms space or is that ban partly why your computing and storage segments also went down sequentially in the fourth quarter?
Bernie Blegen, CFO
Again, we don't generally talk about individual customers, but since this one has gotten so much visibility, we actually have three primary lines of business with them. One is in consumer, one is in data center, and the other is in infrastructure.
Ross Seymore, Analyst
Infrastructure meaning comms, right?
Bernie Blegen, CFO
Yes.
Ross Seymore, Analyst
Gotcha. Okay. Is there any difference in what you're able to ship going forward out of those three things? Are you able to ship all of them, or just the other two?
Michael Hsing, CEO
Well, our products there are essentially building blocks. In particular, for the consumer and data center business; they share the same products. We're not entirely sure how they divide it, but for consumer devices, such as chargers, we know it's continuing.
Bernie Blegen, CFO
Yes.
Ross Seymore, Analyst
Gotcha. And then, the last question is a little bit more housekeeping-wise. Bernie, what are you thinking about the tax rate for 2021?
Bernie Blegen, CFO
Yeah. So, on a non-GAAP basis, we've historically used 7.5% and now we've moved to 10%, which reflects that certain stock compensation is no longer as deductible as it was in prior years. Looking ahead, we're not going to try to predict what the Biden administration will do. But I believe we need to be sensitive to the fact that there may be increases in both the domestic tax rate as well as a higher tax rate on any international profits.
Michael Hsing, CEO
Yes. We don't know at this point.
Ross Seymore, Analyst
Got it. Thanks guys.
Genevieve Cunningham, Moderator
If there are any follow-up questions, please click the raise hand button. As there are no further questions, I'd like to turn the webinar back over to Bernie.
Bernie Blegen, CFO
Great. Thank you, everybody. I appreciate your joining us for this conference call and look forward to talking to you again in the first quarter of 2021, which should likely be in the April timeframe. Thanks again, and have a nice day.