Earnings Call Transcript - MPWR Q2 2023

Genevieve Cunningham, Moderator

Welcome, everyone, to the MPS Second Quarter 2023 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, and Bernie Blegen, VP and CFO. 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 Q2 earnings release and in our SEC filings, including our Form 10-K filed on February 24, 2023, and our Form 10-Q filed on May 5, 2023, which are 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, 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. Tables that outline the reconciliation between the non-GAAP financial measures to GAAP financial measures are included in our Q2 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 one 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, VP and CFO

Thanks, Gen. MPS reported second quarter revenue of $441.1 million, which is 2.2% lower than the first quarter of 2023 and 4.3% lower than the second quarter of 2022. Compared to Q1 2023, sales in communications were down, while industrial, storage and computing, consumer, and enterprise data saw improvements. For our second quarter revenue by market: storage and computing revenue was $124.5 million, an increase of 3.9% from the first quarter, driven mainly by higher commercial notebook sales. Year-over-year, this revenue was up 1.8% and constituted 28.2% of MPS' total revenue for the second quarter, compared to 26.5% a year ago. Industrial revenue for the second quarter was $49.7 million, reflecting a 4.8% increase from the previous quarter, supported by higher sales of power source and industrial meter products. However, this revenue was down 11.0% year-over-year, representing 11.3% of the total revenue, down from 12.1% last year. Consumer revenue increased to $65.2 million, a 2.9% improvement from Q1, mainly due to higher sales in gaming, TV, and mobile devices, but was down 33.0% compared to last year, making up 14.8% of the total revenue, down from 21.1% in the second quarter of 2022. In enterprise data, revenue reached $48.0 million, up 1.7% from the first quarter, primarily due to initial shipments of new AI applications, though it decreased by 26.4% year-over-year, making up 10.9% of our revenue, down from 14.2% last year. Automotive revenue decreased slightly by 0.9% from the first quarter to $104.4 million while experiencing a 71.1% year-over-year increase, representing 23.6% of total revenue, compared to 13.2% a year ago. Communications revenue was $49.3 million, down 27.4% from the first quarter, largely due to reduced infrastructure sales, and down 16.9% year-over-year, constituting 11.2% of total revenue, down from 12.9% last year. I would like to comment on our business in general. In previous calls, we noted fluctuations in customer ordering patterns, and this has indeed materialized. We are witnessing some order delays and amendments due to pull-in requests, making forecasting beyond Q3 2023 challenging. Nonetheless, our business fundamentals remain strong. Over the past few years, we have significantly expanded our revenue and customer base, especially among Tier 1 accounts. We believe we have solidified our market share gains through the delivery of quality products and services. We also have a robust design win pipeline that positions us well for future growth. Here are a few highlights from recent developments. We have been designated as a preferred supplier for multiple Tier 1 customers in the automotive and telecom sectors. We have begun sampling silicon carbide power solutions for data centers and green energy. Our development in EV power management applications is ongoing, and we are broadening our customer base for AI applications, alongside solutions for next-generation platforms. We have achieved new design wins in battery management solutions and USB-PD for automotive, industrial, and consumer uses, which we expect to be major revenue contributors for 2024 and 2025. Now regarding our gross margin, GAAP gross margin was 56.1%, a decrease of 120 basis points from the first quarter and 260 basis points from last year. Our GAAP operating income was $112.3 million, down from $124.3 million in Q1. Non-GAAP gross margin for the second quarter was 56.5%, down 120 basis points from Q1. The decline in both GAAP and non-GAAP gross margin was primarily due to unfavorable variances and higher direct costs. Our non-GAAP operating income for Q2 was $153.1 million, a decrease from $164.1 million in Q1. Looking at operating expenses, our GAAP expenses in Q2 were $135.4 million, up slightly from $134.5 million in Q1. Our non-GAAP operating expenses were $96.0 million, unchanged from the previous quarter. The difference between GAAP and non-GAAP operating expenses is mainly due to stock compensation and losses on an unfunded deferred compensation plan. In Q2, total stock compensation expense was $38.0 million, up from $37.0 million in Q1. Switching to our bottom line, Q2 GAAP net income was $99.5 million, or $2.04 per diluted share, down from $109.8 million, or $2.26 per share in Q1. Non-GAAP net income for Q2 was $137.5 million, or $2.82 per diluted share, compared to $146.0 million, or $3.00 in Q1. Diluted shares outstanding at the end of Q2 were 48.8 million. Now, on to our balance sheet. Cash, cash equivalents, and investments at the end of Q2 stood at $941.1 million, slightly up from $919.1 million at the end of Q1. For the quarter, we generated approximately $90.2 million in operating cash flow, down from $218.8 million in Q1. Our accounts receivable at the end of Q2 were $169.2 million, reflecting 35 days sales outstanding, two days lower than in Q1. Internal inventories at the end of Q2 were $427.4 million, down from $430.8 million in Q1, resulting in 201 days of inventory, a decrease of three days from the prior quarter. Comparing current inventory levels with projected revenue for the following quarter, days of inventory dropped to 184 days at the end of Q2 from 203 days at the end of Q1. Looking ahead, for the third quarter of 2023, we are forecasting revenue in the range of $464 million to $484 million; GAAP gross margin between 55.5% and 56.1%; non-GAAP gross margin between 55.7% and 56.3%; total stock-based compensation between $33.5 million and $35.5 million, including about $1.0 million charged to cost of goods sold; GAAP operating expenses of $129.4 million to $133.4 million; non-GAAP operating expenses between $96.9 million and $98.9 million, excluding stock compensation but including litigation costs; interest and other income of $3.0 million to $3.4 million before foreign exchange impacts; fully diluted shares in the range of 48.6 million to 49.0 million. In summary, we remain committed to executing our long-term strategy. I will now open the floor for questions.

Genevieve Cunningham, Moderator

Thank you, Bernie. Analyst, I would now like to begin our Q&A session. As a reminder, if you would like to ask a question, please click on the Participants icon on the menu bar and then click the Raise Hand button. Our first question is from Ross Seymore of Deutsche Bank. Ross, your line is now open.

Ross Seymore, Analyst

Thanks for letting me ask a question. Just wanted to ask Bernie first, when you had your general business condition update about orders remaining volatile, etc., I wonder if you could just give us a little more color. Are things kind of improving, staying the same? And is there any changes in things like competitive intensity, pricing, geographic differences? Any color, a little bit more detail than what you gave on your original preamble?

Bernie Blegen, VP and CFO

Certainly, I'm happy to provide some insights on that. We began this discussion by recognizing that in the last three quarters, we expect ordering patterns to fluctuate. This is typical after a period of unusual ordering that causes a mismatch between demand and supply. As we address our backlog, we see customers trying to align with what they anticipate will be end customer demand. Consequently, we don't have the same level of visibility beyond 90 to 120 days that we usually experience during more stable ordering patterns, which has resulted in reduced predictability. Regarding your second question, one constant has been that we operate in a highly competitive market. Price reductions are common, and competitors are actively seeking to capture as much additional business as they can during this transitional phase.

Michael Hsing, CEO

Let me add, too. We do see a slight improvement in the first quarters, and essentially, it's similar. And we do see the consumer business improvement from both the U.S. side to Asia side, and other ones pretty much stay the same.

Ross Seymore, Analyst

Great. Thanks for that. I guess as my follow-up, Bernie, you guys have had relatively volatile end markets, not specific to you, but just in a general sense. So, any sort of color in your guide for the third quarter between the various end markets? And the one I think most people are most interested in albeit still a relatively smaller part of your business is your enterprise data segment. Any sort of color between the AI side, you talked about last for the second quarter, and the CPU side, which has been a little bit weaker?

Michael Hsing, CEO

We don't have any concerns regarding our AI-related products, as demand is currently outpacing our supply. However, in terms of enterprise data, areas like data centers and CPU resources are still experiencing delays.

Bernie Blegen, VP and CFO

Yeah. And one other thing to add, and this is specific to MPS, not necessarily a broader comment at the general market, but automotive came in a little bit lower than would have been expected. And as we look at the ramp in the second half, we're observing that at least for two of our customers, unit volumes appear to be lower, and we had two product launches which have been delayed into Q4 and Q1.

Ross Seymore, Analyst

Thanks, guys.

Genevieve Cunningham, Moderator

Our next question is from Quinn Bolton of Needham. Quinn, your line is now open.

Quinn Bolton, Analyst

Hey, Michael and Bernie. I just wanted to ask on the GPU side of the business. There's been recent chatter in the market that one of your large customers may be bringing in Renesas as a second source as well as potentially Vicor. Just wondering if you might share any thoughts you have as you look forward with that customer about the impact of multi-sourcing with that customer? And maybe a related question, how are you feeling about your position looking into the next generation 3-nanometer processor at that customer? And then, I've got a follow-up. Thanks.

Michael Hsing, CEO

Okay. I believe we are currently in a strong position. We are actively involved in future design and developing a new product for the next generation. Other than that, we cannot speculate on anything.

Bernie Blegen, VP and CFO

I think in most scenarios, and this particular customer's representative is they want to take a leadership position through innovation, and they found us an equal partner for that. But it's in everybody's best interest that it'd be a competitive, not a single source. And so, yes, we'd always anticipated that there would be redesigns that allow competition into the market.

Michael Hsing, CEO

We had to provide the best solution, while also recognizing that our customers need other options. This market is very large, and MPS cannot supply everything. Additionally, we focus on diversified growth. If there is a performance need, I believe MPS is currently the best solution for the near future.

Quinn Bolton, Analyst

Thank you, Michael. Bernie, you'd mentioned sort of visibility out beyond 90 to 120 days is pretty choppy at this point just given the industry dynamics. I guess I look out to the fourth quarter, and it looks like the Street has modeled the fourth quarter approximately flat, which I think is an above seasonal pattern for MPS historically. And I'm just wondering can you comment whether you think an above seasonal fourth quarter looks right to you, perhaps given the ramp in the GPU business and some of the timing shifts you just mentioned in automotive? Or do you think it would be best for investors to think that the December quarter is going to see a seasonal decline?

Bernie Blegen, VP and CFO

Yeah. I think that normal seasonality for MPS would be somewhere between a sequential decline of between 4 percentage points and 5 percentage points. And I can point to the increase in the notebook sales during Q3, which precedes Christmas, so that's a normal seasonal factor that's expected to come down. And we're not seeing the uplift that had been anticipated from automotive. So, I would be more comfortable with a seasonal down in Q4.

Michael Hsing, CEO

You mentioned seasonality, and I'm trying to understand what that looks like now. In the past couple of years, we had a strong Q4, especially the year before last. Customers experienced shortages, but now the demand is significantly lower. Last year, we saw over a 40% year-over-year increase, but this year it is much less, and I can’t categorize it as seasonality anymore. It's not very clear. However, as Bernie mentioned, we typically see a decline during seasonal periods.

Quinn Bolton, Analyst

Understood. Thank you, Michael. Thank you, Bernie.

Genevieve Cunningham, Moderator

Our next question is from Rick Schafer of Oppenheimer. Rick, your line is now open.

Rick Schafer, Analyst

Thanks. Yeah, guys, I just had a couple of questions if I could. The first one is if I could kind of maybe revisit auto for a second. I mean, you mentioned power isolation module in your prepared remarks. And I don't know if you could give us a little bit more color there. Like, kind of an update on how many customers are evaluating the product now? Talk a little bit about if you could, like, design win timing, revenue timing, kind of expectation there? And is auto going to be the first to ramp and then data center and then more of the green stuff? Or how does it all kind of shake out, I guess, is what I'm asking.

Michael Hsing, CEO

There was a slight delay, but we will reintroduce sampling and announce it. The delay was due to technical issues. Currently, we have resampled it, primarily in the automotive sector and data centers. As mentioned earlier, we will start to sample the silicon carbide products as well.

Rick Schafer, Analyst

Thank you, Michael. My second question is regarding your nearly $2 billion power management business. I understand that modules are expected to represent about 10% of that this year, which is a significant increase from virtually nothing a couple of years ago. If this business continues to evolve, and I believe it has better margins, I think the core average is a fivefold ASP multiplier. Michael, could you share your thoughts on how much you expect this business to grow as a percentage of the mix in the future? Are there specific end markets that will benefit first from the move into modules?

Michael Hsing, CEO

Yes. I believe that's our future. When customers desire plug-and-play solutions that require less technical involvement with power management, the module solution is the way to go. Customers prefer not to purchase ICs and design all the components themselves. Initially, we are seeing significant growth in the automotive sector, industrial sites, and telecommunications, as well as semiconductor equipment. There are many aspects to discuss, but primarily, these products are not price-sensitive and do not cater to high-volume consumer markets. We are still in the early stages, with a broad customer base and new products launching, and we expect to see similar growth rates in the coming years.

Rick Schafer, Analyst

Got it. Thanks, Michael.

Genevieve Cunningham, Moderator

Our next question is from Jeremy Kwan of Stifel. Jeremy, your line is now open.

Jeremy Kwan, Analyst

Thank you. Yes, this is Jeremy on for Tore. I guess maybe a first question on the comms business. It was down meaningfully as you guys expected, and we're probably one of the early ones to call out last quarter. I guess what's your sense of where things are now? Should we expect this business to kind of sort of bounce along at these levels in the second half before maybe picking up next year? And what are your customers telling you in terms of their expectations?

Michael Hsing, CEO

We did not participate in the 4G market, and the 5G and other infrastructure businesses are new for us. 5G has not yet ramped up quickly. Our products were designed over the last few years, and we are just waiting for our customers to place orders, but so far it's unclear. Next question?

Genevieve Cunningham, Moderator

Our next question is from William Stein of Truist. William, your line is now open.

William Stein, Analyst

Thanks for taking my questions. First, I'm hoping you can discuss channel inventory. Looking at your P&L, you saw nearly 50% revenue growth last year. There seems to be a strong sentiment among investors that there might still be some inventory in the channel that needs to be addressed. We would appreciate any updates or measurements you can provide on that.

Bernie Blegen, VP and CFO

Sure. So, as far as what we observed in Q2 is that there was a meaningful decrease in channel inventories both in terms of dollars and days. And the sort of phenomena that we've seen has been a time delay between when the end customer places an order and when they want to do a pullback because of uncertainty with what end customer demand has been. So, I can point to a couple of our end markets where that was very clear. But we believe right now that we're in a position to continue to normalize channel inventories over the next two quarters.

William Stein, Analyst

So, it hasn't been normalized yet, so in September for guidance, I assume there's some expectation that sell-in will be lower than sell-through. Is that correct?

Bernie Blegen, VP and CFO

Yeah. Looking back at the comments regarding visibility and predictability beyond 90 or 120 days, it's not just about the new orders we are receiving, but also the strength of the sell-through, which is a bit more challenging to forecast.

Genevieve Cunningham, Moderator

Our next question is from Matt Ramsay of Cohen. Matt, your line is now open.

Matt Ramsay, Analyst

Thank you very much. Michael, Bernie, can you guys hear me okay?

Michael Hsing, CEO

Yes.

Matt Ramsay, Analyst

Awesome. For my first question, Michael, we've discussed how the company aims to rebuild the consumer business as a larger percentage of revenue over time and return it to a higher level. I would like to revisit some of those discussions and hear your thoughts on supply, the demand environment, and the competitive landscape as you work to reemphasize the company in certain strategic areas of the consumer segment. Thank you.

Michael Hsing, CEO

That's a good question. We are seeing some improvement, but it's still early days. Our supply costs have decreased significantly, and as Bernie mentioned, our inventory values will now reflect this. Historically, MPS has been seen as a price leader in the market. We don’t focus on the consumer segments where there's intense competition. Higher gross margins are found in our other segments, largely because they leverage our technological strengths. We offer a more efficient and compact solution. In recent years, we've somewhat neglected the consumer segment due to insufficient revenues and capacity. However, it's not too difficult for us to return to the strategies we've successfully employed since going public.

Matt Ramsay, Analyst

Thanks, Michael. I think as my follow-up question, I wanted to really focus on the enterprise data segment just because that's where a large percentage of my investor questions come from. And I think there's two dynamics going on here, right, the strength of the AI business with your lead customer there, and some softness in the CPU market that's well documented. And so, the question is really what would you guys, I think, have built on books inventory to support ramps of all the customers in that space? So, I guess the question is, how quickly and what would the lead times be to respond to an uptick in demand? And do you have any visibility into the timing of a potential reacceleration of that segment? And how long is that visibility? Thanks.

Michael Hsing, CEO

Our visibility is satisfactory and is well known. If you're following major AIs, you'll notice MPS, and you'll see its potential in the coming quarters. I can discuss technical issues as well. I believe MPS significantly outperforms our competition. For the next generation of our AI processor, we began our work on it about a year to 18 months ago. Our relationship remains strong, and there are even more technical challenges ahead. This space is crucial, and we need to dissipate all the heat. For the next generation, power consumption will be higher. We offer comprehensive vertical solutions and lead in this area. All other solutions need to accommodate specific form factors, and the integrated solution is the only viable approach.

Bernie Blegen, VP and CFO

And I think if I could just add to that, it's also the breadth of the customer opportunities that we're engaged with. And over the course of the next four quarters, we're going to see multiple new customer applications launch initially with MPS. So, yes, we have a very powerful initial position with one customer, but we expect to branch that out very quickly.

Michael Hsing, CEO

It was multiple customers.

Matt Ramsay, Analyst

Thank you, guys. Really appreciate it.

Genevieve Cunningham, Moderator

Our next question is from Hans Mosesmann of Rosenblatt. Hans, your line is now open.

Jeremy Kwan, Analyst

Yes. Hi. Thank you for allowing me a follow-up here. I guess, I wanted to ask about capacity. You guys have always been very ahead of the curve on long-term capacity and through up and down cycles. I was wondering how you're thinking about it in this environment and whether or not that may give you guys a competitive advantage in some of these applications that you're really targeting? And, also, if you have a CapEx number for this quarter? Thank you.

Michael Hsing, CEO

As we mentioned earlier, many of our customers have requested to move out of China, and we have now achieved over 50% of our capability outside of China. However, we currently have more inventory than we would like and aim to sell more from our inventory. Does that answer your questions?

Bernie Blegen, VP and CFO

Yeah. And I think that when you look at capacity today, it's really when this environment turns around and becomes more predictable, how are we positioned to service our customers a year and two years from now. And I think the investments that we're making, both in terms of expanding capacity and diversifying it geographically, both on the front-end and the back-end will pay very good dividends as far as customer satisfaction.

Genevieve Cunningham, Moderator

Our next question is from Chris Caso of Wolfe. Chris, your line is now open.

Chris Caso, Analyst

Yes. Thank you. Good evening. First question is regarding order visibility. And I ask because for the past several quarters, there really hasn't been any requirement for turns business going forward. Is that something that's changing going forward, given some of the changes in the end markets? And what does that mean with regard to revenue visibility as we look out over the next few quarters?

Bernie Blegen, VP and CFO

Sure. I believe Michael addressed this well. We noticed some improvement in Q2 compared to Q1 regarding our net bookings, but it does not match the levels we experienced in years like 2018 or 2020. Previously, we would have nearly 90% to 95% of our next quarter's revenue secured by the end of the previous quarter, relying on only a small portion of turns business to hit our targets for that specific quarter. While steady improvement is evident, we have yet to reach a point where we can achieve that level of predictability.

Chris Caso, Analyst

Got it. Thank you. As a follow-up, I just had a follow-up question about supply, and I understand that that supply is getting a bit easier out there. Historically, I think your ability to procure supply from places different from your competitor has been a source of competitive advantage for Monolithic Power. How do you see the landscape going forward? I know you're bringing on some different foundry partners as you try to diversify outside of China. What do you think that means for both your access to wafers over the long term as well as the pricing? Do you think that competitive advantage remains?

Michael Hsing, CEO

The material costs have returned to pre-pandemic levels, which is important to note in relation to pricing. We aim to expand beyond China in response to our customers' requests and also for our anticipated growth over the next few years. We are committed to our long-term plan and are currently investing, although this may slow slightly in the coming quarters. However, we expect to stay on course for long-term success.

Genevieve Cunningham, Moderator

If there are any follow-up questions, please click the Raise Hand button. As there are no further questions, I would like to turn the webinar back over to Bernie.

Bernie Blegen, VP and CFO

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