Monolithic Power Systems Q3 2022 Earnings Results & Report

Monolithic Power Systems EPS Results

• Actual EPS: $2.64
• Consensus EPS: $2.73
• Beat/Miss: Missed by -$0.09
• One Year Ago EPS: N/A
• EPS Beat Rate: 7 of last 8 quarters

Monolithic Power Systems Revenue Results

• Actual Revenue: $495.42 million
• Expected Revenue: $490.45 million
• Beat/Miss: Beat by +$4.97 million
• YoY Revenue Growth: N/A

Monolithic Power Systems (NASDAQ:MPWR) (NASDAQ: MPWR) is a semiconductor company that designs, develops and markets high-performance power-management solutions. Its products help regulate, convert, distribute and control electrical power in electronic systems, supporting applications that require efficient and reliable power delivery.

The company’s portfolio includes integrated circuits, power modules, battery-management products, motor drivers, LED drivers and related analog and mixed-signal semiconductor solutions. These products are used in markets such as computing and data infrastructure, automotive, industrial, communications, consumer electronics and energy systems.

Founded in 1997, Monolithic Power Systems is headquartered in Kirkland, Washington, and serves customers internationally through a global sales and distribution network. The company was founded by Michael Hsing, who has served as its chief executive officer and has played a central role in its development as a provider of power-management technologies.

Monolithic Power Systems Q3 2022 Earnings Call Transcript

Key Takeaways

• MPS achieved a record Q3 revenue of $495.4 million, up 7.5% sequentially and 53.1% year-over-year on broad-based growth across markets.
• Non-GAAP net income rose to $170.7 million ($3.53/sh) in Q3 from $157.0 million ($3.25/sh) in Q2, with non-GAAP gross margin steady at 59.0%.
• Q4 revenue is guided to $450 million–$470 million, reflecting a projected sequential decline driven by softening consumer and storage & computing demand.
• Inventory days climbed to approximately 189 days versus a 180–200 target as customers cut orders, but management remains unconcerned given the long (>6 year) product lifecycles.
• The company is diversifying production beyond China via new partnerships (including TSMC) and European/South Korean fabs, and sees no material impact from recent US export controls due to its >40 nm process nodes.

Presentation

[Genevieve Cunningham, Marketing Communications Manager at Monolithic Power System Inc]

Welcome everyone to the MPS Third Quarter 2022 Earnings Webinar. Please note that this webinar is being recorded and will be archived for one year on our investor relations page at www.monolithicpower.com. My name is Genevieve Cunningham, and I will be the moderator for this webinar. Joining me today are Michael Hsing, CEO and founder of MPS, and Bernie Blegen, VP and CFO. 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.

[Genevieve Cunningham, Marketing Communications Manager at Monolithic Power System Inc]

Risks, uncertainties, and other factors that could cause actual results to differ are identified in the safe harbor statements contained in the Q3 2022 earnings release and in our latest 10-K and 10-Q filings that can be found on 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 before income taxes, net income, and earnings on both a GAAP and a non-GAAP basis.

[Genevieve Cunningham, Marketing Communications Manager at Monolithic Power System Inc]

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 Q3 2022 earnings release, which we have furnished to the SEC and is currently available on our website. Now I'd like to turn the call over to Bernie Blegen.

[Bernie Blegen, VP and CFO at Monolithic Power System Inc]

Thanks, Gen. First of all, today I'm greeting you from Europe. We held our third quarter board of directors meeting in our Barcelona office. We had our board members tour the facility and oversee the operations here. Now to the financial results. MPS achieved record third quarter revenue of $495.4 million, 7.5% higher than revenue in the second quarter of 2022, and 53.1% higher than revenue in the third quarter of 2021. This broad-based year-over-year revenue growth was the result of consistent execution against our strategies. Looking at our third quarter 2022 revenue by market. Third quarter automotive revenue of $87.1 million increased 42.7% from the second quarter of 2022, due primarily to new platform launches.

[Bernie Blegen, VP and CFO at Monolithic Power System Inc]

Third quarter 2022 automotive revenue was up 60.0% year-over-year. Automotive revenue represented 17.6% of MPS's third quarter 2022 revenue, compared with 16.8% in the third quarter of 2021. Third quarter 2022 communications revenue of $72.3 million was up 21.9% from the second quarter of 2022. Most of this sequential revenue increase was related to the continued communications infrastructure ramp. Third quarter 2022 communications revenue was up 61.8% year-over-year. Communications sales represented 14.6% of our total third quarter 2022 revenue, compared with 13.8% in the third quarter of 2021.

[Bernie Blegen, VP and CFO at Monolithic Power System Inc]

In our enterprise data market, third quarter 2022 revenue of $75.3 million increased 15.5% from the second quarter of 2022, primarily due to continued strength in our data center and workstation computing sales. Third quarter 2022 revenue represented 15.2% of MPS's third quarter 2022 revenue, compared with 9.2% in the third quarter of 2021. Third quarter 2022 industrial revenue of $58.7 million increased 5.1% from the second quarter of 2022. Third quarter 2022 industrial revenue was up 12.5% year-over-year. Industrial revenue represented 11.8% of our third quarter 2022 revenue, compared with 16.1% in the third quarter of 2021.

[Bernie Blegen, VP and CFO at Monolithic Power System Inc]

Storage and computing revenue of $112.9 million decreased 7.7% from the second quarter of 2022. The sequential revenue decline was primarily due to softening of customer demand from notebooks. Third quarter 2022 storage and computing revenue was up 63.9% year-over-year. Storage and computing revenue represented 22.8% of MPS's third quarter 2022 revenue, compared with 21.3% in the third quarter of 2021. Third quarter consumer revenue of $89.2 million decreased 8.4% from the second quarter of 2022. The sequential quarterly revenue decline was primarily due to softening of overall demand. Third quarter 2022 consumer revenue was up 21.1% year-over-year.

[Bernie Blegen, VP and CFO at Monolithic Power System Inc]

Consumer revenue represented 18.0% of MPS's third quarter 2022 revenue, compared with 22.8% in the third quarter of 2021. Let's talk about the general business conditions. For the prior six quarters, we have faced product shortages, especially in consumer storage and computing. Now we have started to see our customers reduce their orders and push out shipments. We've experienced similar patterns in the past. We anticipate order patterns might oscillate in the near future. This is not a surprise to us. As a result of this change in ordering patterns, our inventory levels will catch up to our target of 180-200 days and possibly be higher in the near term. In addition, we have over 4,000 different products which are required to support thousands of our customers' applications.

[Bernie Blegen, VP and CFO at Monolithic Power System Inc]

On average, our product life cycles exceed six to eight years, so we are not concerned with carrying an inventory level above target. MPS's business is in a better position today. Rather than managing product shortage problems, we can now focus on long-term business development. For longer cycle business like automotive, enterprise data, comms infrastructure, and industrial, both our customers and MPS have expended significant effort and made joint investments in the development of multiple leading-edge products and applications. As a result, we have secured business which we believe will ramp over the next several years, driving revenue growth. For shorter cycle consumer-related business, we will continue to proactively support our customers' needs. We've established MPS as a reliable supplier with excellent customer support during this extended period of product shortages. Accordingly, we believe both longer and shorter cycle customers value MPS as a strategic partner.

[Bernie Blegen, VP and CFO at Monolithic Power System Inc]

We are cautious about the overall business conditions and believe we can swiftly adapt to market changes as we have done successfully during similar macroeconomic changes in the past. There have been recent changes to export control rules, and additional companies have been added to the entities list. As of today, we see immaterial revenue impact directly or indirectly from those new trade restrictions. Our products utilize process nodes in excess of 40 nm, which falls well outside the current restrictions. Moving now to a few comments on gross margin and operating income. Third quarter of 2022, GAAP gross margin was 58.7%, which was 10 basis points lower than the second quarter of 2022 and 110 basis points higher than the third quarter of 2021.

[Bernie Blegen, VP and CFO at Monolithic Power System Inc]

Our GAAP operating income was $151.9 million compared to $141.9 million reported in the second quarter of 2022. Non-GAAP gross margin for the third quarter of 2022 was 59.0%, essentially flat from the gross margin percentage reported in the second quarter of 2022 and 120 basis points higher than the third quarter from a year ago. Our non-GAAP operating income was $193.7 million, compared to $179.4 million reported in the second quarter of 2022. Let's review our operating expenses.

[Bernie Blegen, VP and CFO at Monolithic Power System Inc]

Our GAAP operating expenses were $139.0 million in the third quarter of 2022, compared with $129.1 million in the second quarter of 2022, and $109.2 million in the third quarter of 2021. Our non-GAAP third quarter 2022 operating expenses were $98.4 million, up from $92.7 million in the second quarter of 2022, and up from the $78.7 million reported in the third quarter of 2021. The differences between non-GAAP operating expenses and GAAP operating expenses for the quarters discussed here are primarily stock compensation expense and income or expense from an unfunded deferred compensation plan.

[Bernie Blegen, VP and CFO at Monolithic Power System Inc]

For the third quarter of 2022, total stock compensation expense, including approximately $1.2 million charged to cost of goods sold, was $43.0 million, compared with $42.9 million recorded in the second quarter of 2022. Switching to the bottom line. Third quarter 2022 GAAP net income was $124.3 million, or $2.57 per fully diluted share, compared with $114.7 million or $2.37 per share in the second quarter of 2022, and $68.8 million or $1.44 per share in the third quarter of 2021.

[Bernie Blegen, VP and CFO at Monolithic Power System Inc]

Q3 2022 non-GAAP net income was $170.7 million or $3.53 per fully diluted share, compared with $157 million or $3.25 per share in the second quarter of 2022, and $98.6 million or $2.06 per share in the third quarter of 2021. Fully diluted shares outstanding at the end of Q3 2022 were 48.3 million. Now let's look at the balance sheet. Cash, cash equivalents, and investments were $738.1 million at the end of the third quarter of 2022, compared to $814.1 million at the end of the second quarter of 2022.

[Bernie Blegen, VP and CFO at Monolithic Power System Inc]

For the quarter, MPS generated operating cash flow of about $18.2 million compared with Q2 2022 operating cash flow of $105.2 million. The decline in operating cash flow and increase in other long-term assets reflected a $170 million prepaid payment made during the quarter to secure a long-term purchasing commitment. Accounts receivable ended the third quarter of 2022 at $153.4 million, representing 28 days of sales outstanding, which was three days higher than the 25 days reported at the end of the second quarter of 2022, and six days higher than the 22 days at the end of the third quarter of 2021.

[Bernie Blegen, VP and CFO at Monolithic Power System Inc]

Our internal inventories at the end of the third quarter of 2022 were $397.4 million, up $37.8 million from the $359.6 million reported at the end of the second quarter of 2022. Inventory at the end of the third quarter of 2022 represented 167 days, which were five days lower than at the end of the second quarter of 2022. Historically, we have calculated days of inventory on hand as a function of the current quarter revenue. We believe comparing current inventory levels with the following quarter's revenue provides a better economic match.

[Bernie Blegen, VP and CFO at Monolithic Power System Inc]

On this basis, you can see inventory at the end of the third quarter of 2022 represented 189 days, 29 days higher than the 160 days at the end of the second quarter of 2022, and 56 days higher than the 133 days at the end of the third quarter of 2021. I would now like to turn to our outlook for the fourth quarter of 2022. We are forecasting Q4 revenue in the range of $450 million-$470 million. We also expect the following. GAAP gross margin to be in the range of 58.1%-58.7%. Non-GAAP gross margin in the range of 58.3%-58.9%.

[Bernie Blegen, VP and CFO at Monolithic Power System Inc]

Total stock-based compensation expense of $37.7 million-$39.7 million, including approximately $1.1 million that would be charged to cost of goods sold. GAAP R&D and SG&A expenses should be between $131 million and $135 million. Non-GAAP R&D and SG&A expenses are expected to be in the range of $94.4 million-$96.4 million. Litigation expense is expected to be in the range of $1.3 million-$1.7 million. Interest income is expected to be in the range from $1.1 million to $1.5 million. Fully diluted shares are expected to be in the range of 48.2 million-49.2 million shares.

[Bernie Blegen, VP and CFO at Monolithic Power System Inc]

In conclusion, even though business conditions are softening, our market share gains continue to expand, reflecting high customer engagement and our ability to secure design wins. We can now focus on growing our long-term business. I will now open the webinar up for questions.

[Genevieve Cunningham, Marketing Communications Manager at Monolithic Power System Inc]

Thank you, Bernie. Analysts, 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 participant's icon on the menu bar and then click the raise hand button. Our first question comes from Matthew Ramsay of Cowen. Matt, your line is now open.

[Matthew Ramsay, Managing Director and Senior Semiconductor Analyst at Cowen]

Thank you very much. I guess good evening, guys, if you're in Europe. Michael, Bernie, can you hear me okay?

[Bernie Blegen, VP and CFO at Monolithic Power System Inc]

Yes. We can hear you.

[Matthew Ramsay, Managing Director and Senior Semiconductor Analyst at Cowen]

Thanks, guys. Two different questions from me. One sort of related to the model and the near term and the other one on a different topic. The first question, Bernie, if you could help us a little bit. I mean, the guidance was a bit light when you talked about some of the macro conditions, but it seemed like weakness was concentrated in the storage and computing segment. If you could maybe talk about things by segment and what your guidance implies on a quarterly basis by segment, I think that would be helpful. I have a follow-up. Thank you.

[Bernie Blegen, VP and CFO at Monolithic Power System Inc]

Sure. Just to clarify that the softness that we're seeing is both in the storage and computing as well as consumer. The other segments are still positioned to show growth between Q3 and Q4. The only sort of qualifier that we're still trying to learn about the strength and the run rate of the communications segment. I think what we've done is we feel very, very comfortable with both how we've been communicating our expected results, but we've added a little conservatism to the outlook.

[Matthew Ramsay, Managing Director and Senior Semiconductor Analyst at Cowen]

Got it. Great. Thank you for that. Michael, my second question is on the topic of China. Over the last, I would say three or four weeks since some of the new Commerce and BIS restrictions have come into place, I've been getting a ton of investor questions about this topic with relation to your company on two fronts. I guess the first being, your MPS has a significant employee base in China. If you could maybe quantify what maybe percentage of your employees and in what functions are actually in China, and if you've heard from any of these restrictions that there could be any restrictions on those employees, need to relocate anybody, those kind of things.

[Matthew Ramsay, Managing Director and Senior Semiconductor Analyst at Cowen]

The second part of the question is on your manufacturing footprint. I know it's spread across China, Taiwan, increasingly in Korea. We've heard some stories from semi-cap companies needing to pull employees out of SMIC, for example, and other places because of these new restrictions. Anything in your manufacturing operations that might be disrupted at all because of some of the China restrictions? How far are you guys along in or maybe the mix of your capacity that's now outside of China. You get the nature of the questions, but they've been pretty frequent and acute over the last three or four weeks. It'd be great if you could just kinda address some of those topics. Thank you.

[Michael Hsing, Chairman of the Board, President, and CEO at Monolithic Power Systems]

Very nice questions. Okay. I'm glad you asked. What all your concern is, I think the most of the people totally misconstrued the whatever the regulation is. We do have a presence. We have a large presence within China. This is U.S. company, okay? We're not subject to sanctions at all. We don't have to have Americans leave our MPS office within China. That's not in the sanctioned entity list. We are not in a sanctioned entity list. Otherwise, the manufacturing. You, in the last couple of quarters, we talk about it. We diversified out of China. We're starting five or six years ago.

[Michael Hsing, Chairman of the Board, President, and CEO at Monolithic Power Systems]

Also, I should have mentioned that we talk about it the engineering manpower. This is MPS started in 2017. We are in Barcelona now, so okay, we've grown a very large team here and with local government support. We are outside of China. That's not because of sanctions, because we wanna diversify geographically. We will grow into a different region. In the same time zones where we give our customers the better support.

[Bernie Blegen, VP and CFO at Monolithic Power System Inc]

Just to finish up on Michael's comment there, to be perfectly clear, our technology and our products are not subject to restrictions.

[Matthew Ramsay, Managing Director and Senior Semiconductor Analyst at Cowen]

No, thank you very much. Just really, really quick follow-up. What would you say the percentage, Michael, of the products or the revenue that is actually sourced from manufacturing footprints inside of China today versus outside? Thank you very much for indulging my questions, guys. I appreciate it.

[Michael Hsing, Chairman of the Board, President, and CEO at Monolithic Power Systems]

It is very convoluted, and it is very convoluted, and packaging's and also the process, many wafer manufacturers. It's very convoluted. We don't have clear figures now. Going back to Bernie's questions and Bernie's answers, our technologies, we're using 40 nm above. The current sanctions is 14 nm below. We are far, we're as Bernie mentioned in the script, we are far from the sanctions, and we're using the trailing edge. We're using the trailing edge of a fab equipment.

[Bernie Blegen, VP and CFO at Monolithic Power System Inc]

If I can just follow up on one quick point that we made in our script here, is that, as the supply/demand imbalance has normalized, that frees us up from just being in pure production mode to actually be able to invest time in business relationships, to be able to expand and diversify our capacity, which we talked about three quarters ago, where we're gonna go from $2 billion of capacity currently to $4 billion within the next two years, two to three years.

[Michael Hsing, Chairman of the Board, President, and CEO at Monolithic Power Systems]

These are mostly. We're claiming that these are outside of China.

[Bernie Blegen, VP and CFO at Monolithic Power System Inc]

Yeah.

[Genevieve Cunningham, Marketing Communications Manager at Monolithic Power System Inc]

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

[Quinn Bolton, Managing Director and Equity Research Analyst at Needham]

Thanks. Don't wanna pile on the export control questions that Matt was just asked, but had one other clarification.

[Quinn Bolton, Managing Director and Equity Research Analyst at Needham]

You're at 40 nm and above, and so you're not directly affected. My understanding is that to extend a facility, a manufacturing facility in China has multiple process nodes, you know, some above 60 nm and some below 60 nm that mixed use facility would be affected. I'm just wondering, you know, for those Chinese manufacturing facilities, the fab by fab, are any of the fabs that you're running 40 nm and above, do they also produce 60 nm and below, and might therefore be affected by, you know, equipment and/or support restrictions?

[Michael Hsing, Chairman of the Board, President, and CEO at Monolithic Power Systems]

No. These are fab, but usually they don't. The advanced fabs, okay, these are 14 nm below, so they don't share with these outdated fabs like a 40 nm above. Okay, we're primarily using 65 nm, so these are totally different fabs.

[Quinn Bolton, Managing Director and Equity Research Analyst at Needham]

Thanks, Michael. That's what I thought. I just wanted to clarify, because I know as Matt said, there have been lots of questions on this topic. Maybe one for Bernie. I know you're not guiding beyond the December quarter, but obviously the environment is pretty soft right now, especially on orders. I guess as you look out beyond December, can you give us any thoughts as to whether you would see you know less than normal seasonality in March as some of this weakness you know continues into next year?

[Quinn Bolton, Managing Director and Equity Research Analyst at Needham]

I guess the offset would be, Monolithic Power has some pretty I think meaningful market share gains, both on the server CPU side as well as the data center GPU side. You know, when would you think that those share gains, you know, start to kick in and you know, might get you back to, you know, normal seasonal, if not better than seasonal patterns?

[Bernie Blegen, VP and CFO at Monolithic Power System Inc]

Sure. So and again, Quinn, thank you for focusing on more longer term and strategic issues here. I think it's very easy to get caught in thinking about next quarter or just the quarter after that. Everything all the indicators that we're receiving as far as the share gains occurring in the data center are on track. Nothing has been changed there at all. And then as far as how we look at the next few quarters, again, when we apply cautiousness to Q4, I think we could expect that anything that any growth opportunities are more likely to be weighted in the second half of 2023.

[Michael Hsing, Chairman of the Board, President, and CEO at Monolithic Power Systems]

Yeah, but that's our guess and that's our experience. I might as well add on to. You mentioned the CPUs and the CPU-powered data centers, and MPS is a lot more than that. You look at Bernie's read our script and you have automotive and the enterprise data centers and other ones that can-

[Bernie Blegen, VP and CFO at Monolithic Power System Inc]

Communication.

[Michael Hsing, Chairman of the Board, President, and CEO at Monolithic Power Systems]

Other ones are communications. These are still all of them are growing except the consumer-related notebooks, gaming, those types of things. As everybody is aware of, okay, they are softening. They swing from shortage to oversupply and then, you know, almost overnight. These kinds of things we cannot predict, okay? You guys probably predict it better than we know. We just have to react fast.

[Bernie Blegen, VP and CFO at Monolithic Power System Inc]

Yeah.

[Michael Hsing, Chairman of the Board, President, and CEO at Monolithic Power Systems]

Overall, MPS business, all these greenfield products we start to win in the last few years, they will continue to win.

[Quinn Bolton, Managing Director and Equity Research Analyst at Needham]

Sorry, Michael, I didn't wanna shortchange it by only focusing on the data center opportunity. Thanks for that color.

[Michael Hsing, Chairman of the Board, President, and CEO at Monolithic Power Systems]

Thank you.

[Genevieve Cunningham, Marketing Communications Manager at Monolithic Power System Inc]

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

[William Stein, Managing Director and Senior Analyst at Truist]

Great. Thank you so much for taking my questions. I have one near term, one and then a longer term one. From a near term perspective, I'm hoping you can talk about pricing trends and also how your backlog might be changing in terms of the duration of what you have on the books today versus where we've been recently. Then again, I have a sort of longer term follow-up question, please.

[Michael Hsing, Chairman of the Board, President, and CEO at Monolithic Power Systems]

For shorter terms, okay, here's what we see is, okay, for the longer cycle business, it continues because there's no questions related to price, okay? Because all the products, okay, they will last four or five years or even longer, okay? These products are in the ramping cycles. In the shortest cycle, consumer related, as I said earlier, is like notebooks and gaming and or the other personal electronics. Okay. These ones, okay, they're oversupplied. There's no question. We don't have any questions about the prices. That trouble will come in later, it's another quarter later, so I can go back to product designs. Okay?

[Michael Hsing, Chairman of the Board, President, and CEO at Monolithic Power Systems]

That's where this pricing questions, you know, will start to emerge.

[Bernie Blegen, VP and CFO at Monolithic Power System Inc]

Will, you also mentioned backlog, the sort of condition of the backlog overall and relative to historical norms. We still remain very, you know, we're much higher than we have been historically. What this has given us an opportunity to do is address with our customers. In fact, we've been engaged in these conversations for several quarters now on what they expect real demand to be. I think that, as far as our book of business is looking ahead, it remains very healthy.

[William Stein, Managing Director and Senior Analyst at Truist]

Great. The longer term question, I tend to ask each quarter about some of the, you know, more differentiated products and services MPS has, modules in particular. I wonder about the traction of those products and whether you're seeing the uptake of that, you know, either expand or falter given the current environment. Then same thing with e-commerce. Might you have seen more or less of that given the changing demand environment? Thank you.

[Michael Hsing, Chairman of the Board, President, and CEO at Monolithic Power Systems]

Yeah. Those all the products, the modules and the e-commerce business, okay. We don't see any changes, and they are just continued. That's where the MPS future business will be. Okay. We're even more diversified than MPS current business.

[Bernie Blegen, VP and CFO at Monolithic Power System Inc]

I think it's interesting as far as market acceptance for the modules, it really is not concentrated in any one end market. It's actually pretty evenly distributed against all of our markets. That to me is a real clear indicator that it fits in well with our diversification strategy.

[Michael Hsing, Chairman of the Board, President, and CEO at Monolithic Power Systems]

Yeah. Frankly, if you ask me where these module goes, we don't have idea. That is the beauty of it.

[William Stein, Managing Director and Senior Analyst at Truist]

Thank you.

[Genevieve Cunningham, Marketing Communications Manager at Monolithic Power System Inc]

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

[Jeremy Kwan, Associate VP and Equity Research Analyst at Stifel]

Yes. Good evening. Can you hear me okay?

[Michael Hsing, Chairman of the Board, President, and CEO at Monolithic Power Systems]

Yes.

[Jeremy Kwan, Associate VP and Equity Research Analyst at Stifel]

Great. Just a couple of questions first. Just looking at the lighting business, it looked like it had a nice, you know, increase sequentially this quarter. Is there anything that you can call out there? I'm just wanna understand some of the dynamics in that business.

[Bernie Blegen, VP and CFO at Monolithic Power System Inc]

Automotive.

[Jeremy Kwan, Associate VP and Equity Research Analyst at Stifel]

I'm sorry, the lighting. Oh, automotive. Okay. That's what's been driving it.

[Bernie Blegen, VP and CFO at Monolithic Power System Inc]

Yes. As we said in the prepared comments that there were new platforms that were launched. Most of them are tied to the 2023 model year. There were probably three areas, lighting being one of them, that really contributed to the uplift in automotive in Q3.

[Jeremy Kwan, Associate VP and Equity Research Analyst at Stifel]

Is this something that we can look at as a new baseline and then sort of like a steady ramp from here, or should we expect kind of more step functions with each new model year?

[Michael Hsing, Chairman of the Board, President, and CEO at Monolithic Power Systems]

Well, the lighting is in automotive lighting have a variety of them. You have dome lights, you have indicators, all kinds of indicators, you have signals, then you have a headlight. Okay. This is the last couple of quarters and as you see us stepping up and that's a part of a greenfield product in automotive start to ramp. The contents in the cars, okay, we're growing the content and but the number of cars we have, okay, and just at the beginning, we still have a small, very small market share. It will continue to grow.

[Bernie Blegen, VP and CFO at Monolithic Power System Inc]

Yeah.

[Jeremy Kwan, Associate VP and Equity Research Analyst at Stifel]

Got it. Great. Just turning to the long-term purchasing agreement that you talked about, Bernie, can you give us a little bit more details on this? Maybe the magnitude or the size of this deal and how different is this from the way you may have done business in the past. Just any more detail and help us to understand your strategic thinking behind this, that would be very helpful.

[Bernie Blegen, VP and CFO at Monolithic Power System Inc]

Sure. When you think about the period of the supply demand imbalance that we came out of, we had actually a superior competitive position because we had invested in our supply chain earlier than our competition, and that allowed us to have part availability when they didn't, and that allowed for incremental market share gains. As we continue to expand capacity, we're looking for new opportunities and with existing as well as with new fabs. In this instance, we wanted to secure a purchasing agreement that in order that gave us dedicated capacity regardless what the economic environment was.

[Jeremy Kwan, Associate VP and Equity Research Analyst at Stifel]

Just one last question, just touching again on the modules. Can you give us any insight into the, you know, are there differences in terms of the manufacturing supply chain that needs to be managed here? You know, in terms of whether it's sourcing or whether it's, you know, the geographic footprint, are there things that you can call out there as well?

[Michael Hsing, Chairman of the Board, President, and CEO at Monolithic Power Systems]

Let me answer that way. Okay, most of our modules assembly is outside of China.

[Jeremy Kwan, Associate VP and Equity Research Analyst at Stifel]

Great. Thank you very much.

[Genevieve Cunningham, Marketing Communications Manager at Monolithic Power System Inc]

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

[Michael Hsing, Chairman of the Board, President, and CEO at Monolithic Power Systems]

Rick, can you hear us?

[Rick Schafer, Managing Director and Semiconductor Equity Analyst at Oppenheimer]

Yes, sorry, I was muted. Can you hear me now, Bernie?

[Michael Hsing, Chairman of the Board, President, and CEO at Monolithic Power Systems]

Yes.

[Rick Schafer, Managing Director and Semiconductor Equity Analyst at Oppenheimer]

Great. Well, hey guys. Thanks for letting me ask a question. Maybe my first one just on supply. You know, TSMC, obviously your newest foundry partner. I was just curious if you could kind of level set us on where you guys are at in terms of the qualification process, you know, eventual capacity ramp, sort of maybe even get a sense of how much capacity they're gonna have for you ultimately and how much of that might be 8 versus 12 inch. Just trying to get a better handle on them as a partner.

[Michael Hsing, Chairman of the Board, President, and CEO at Monolithic Power Systems]

Yeah. Most of them we use are 12-inch and also the advanced process nodes. Of course that's in the TSMC. Okay. We do use their advanced node, okay? These are for microcontroller, that type of a product. We do use them. These are not being built within China at all. A lot of these products at the very beginning of a ramp. Okay. Now we have all the capacities for these new products. Mostly these are for automotive and communications. Now give us a lot more room to grow.

[Rick Schafer, Managing Director and Semiconductor Equity Analyst at Oppenheimer]

Michael, just to kind of get a sense. I mean, is this, you know, could TSMC be sort of a 10% contributor to capacity in, say, a year's time? Is that too aggressive to kind of think of how quickly they could ramp?

[Michael Hsing, Chairman of the Board, President, and CEO at Monolithic Power Systems]

On the lower side. Okay. As we see now.

[Rick Schafer, Managing Director and Semiconductor Equity Analyst at Oppenheimer]

Thanks a lot. Then a follow-up, I'm just curious to get an update on silicon carbide progress, you know, particularly traction inverters. I mean, how many customers you're engaged with now and when we might expect to see initial revenues. I know we've talked about it in the past, Michael, but just kind of remind us what that dollar content for MPS looks like, you know, ex TV. I'm assuming it would be sort of subsystem, but would anything be discrete or would that all be sort of module/subsystem?

[Michael Hsing, Chairman of the Board, President, and CEO at Monolithic Power Systems]

Yeah. Thank you very much to ask that question. That kind of things, the silicon carbide and high power modules, okay, that's what can be exciting. We do have our first product and that goes through the qualification now. It's working. MPS is not intended to sell as a power device, as a power device only. Like a power set only. We will sell using our combined with our silicon technology produce these small modules.

[Michael Hsing, Chairman of the Board, President, and CEO at Monolithic Power Systems]

We do have many customers engaged all in the automotive sections and also the large energy storage and as well as a BMS, okay, the car charging stations and those kind of things. Okay. This is low. We don't have any revenue yet, okay, but it will be in the next few years.

[Rick Schafer, Managing Director and Semiconductor Equity Analyst at Oppenheimer]

Michael, just a reminder, just sort of what it does to content for you guys or potential content in a car or a vehicle.

[Michael Hsing, Chairman of the Board, President, and CEO at Monolithic Power Systems]

I think these contents will be enormous. That would be in the [inaudible]. A couple of billion dollar opportunity is a very conservative estimate. Just thinking about it, all the power trains, power driver trains, all the charging stations, MPS is not gonna making the sales chip only. We sell the entire systems.

[Rick Schafer, Managing Director and Semiconductor Equity Analyst at Oppenheimer]

Great. Thanks a lot for all the color.

[Genevieve Cunningham, Marketing Communications Manager at Monolithic Power System Inc]

Our next question is from Alex Vecchi of William Blair. Alex, your line is now open.

[Alex Vecchi, Senior Publishing Analyst at William Blair]

Hey, everyone. Thanks for taking my questions. Bernie, maybe one for you just on a housekeeping question around gross margins. Can you elaborate a little bit on the down sequential? The only reason I'm asking is given the end market weakness in notebooks and consumer. I would have thought is lower gross margin mix. Anything you can do to help on that and how to think of it going from here?

[Bernie Blegen, VP and CFO at Monolithic Power System Inc]

Sure, Alex. There's a lot of ingredients that play into the gross margin outlook, and certainly the product margin by end market is a significant part of it. Another is the amount of, I don't wanna call it necessarily unused capacity, but the fixed cost that isn't necessarily absorbed by the same volume. It's really the fixed cost issue as opposed to the sales mix that's putting a little bit of downward pressure on the gross margin.

[Alex Vecchi, Senior Publishing Analyst at William Blair]

Okay. Similarly, to Mike, just to expand on Rick's questions regarding the new fab partner or TSMC. Do you view that relationship eventually being gross margin accretive or dilutive versus your Chinese partners?

[Michael Hsing, Chairman of the Board, President, and CEO at Monolithic Power Systems]

Well, these are event notes, and we're moving the sourcing into other territories, okay? These are more microcontrollers, okay, and more highly digital content products, okay? It's different product. There is no gross margin issues, okay? We don't go down to compete with the price. All the products that we added is more value more in the software side.

[Bernie Blegen, VP and CFO at Monolithic Power System Inc]

I think that when you look at TSMC, these are new and advanced products that we're developing with them, whereas we're at the same time doing an expansion and diversification away from China, and that would include other fabs both in South Korea as well as in Taiwan.

[Alex Vecchi, Senior Publishing Analyst at William Blair]

Okay. That's really helpful. With that, I'll go back into queue. Thank you.

[Genevieve Cunningham, Marketing Communications Manager at Monolithic Power System Inc]

Our next question is from Melissa Fairbanks of Raymond James. Melissa, your line is now open.

[Melissa Fairbanks, VP and Equity Research Analyst at Raymond James]

Hi, guys. Thanks very much. We saw CapEx, maybe a little longer-term question for you. We saw CapEx dip a little in the third quarter. Maybe could you give us an update on your longer-term capacity planning, not just with TSMC, but more broadly? Does the near-term demand weakness impact those longer-term plans? When we're looking at getting to $4 billion in revenue, what's the path to that ramp and the cadence of the investment needed to get there?

[Michael Hsing, Chairman of the Board, President, and CEO at Monolithic Power Systems]

Well, we always if you look at our past, and okay, if you look at how we expand our capacity, what's our investment, okay? So the trend, if you look at it, if you plot in our OpEx and also the growth rate, it should remain pretty constant. In the past four years and in the past eight years, and 12 years other than last two or three years, the growth pattern is really different from previous four years. Whatever the growth rate we have in the next four years, you can use a plug-in, you can use the same kind of percentage range.

[Bernie Blegen, VP and CFO at Monolithic Power System Inc]

[inaudible], keep in mind that when we do the fab expansion, the capital expenditures are borne by our partners, not directly by us. When you look at our run rate that Michael's referring to, that's more heavily concentrated in test equipment, which can fluctuate from anywhere between $8 million per-quarter to $14 million per-quarter. It just so happens that we made a lot of those investments earlier in the year, and that's why we're lower. The other thing that we invest in is that we do buy or we develop our own facilities, and those can be, you know, layered on. Currently, there are no investments of any material nature.

[Michael Hsing, Chairman of the Board, President, and CEO at Monolithic Power Systems]

Yeah, let me clarify this a little more, okay? Rather than I give you a model, okay. You know, MPS, we don't own the fab. We don't own the fab equipment. The cost of associating with the capacity expansion, one is we have to qualify the process. The large portion of it is to qualify our products. We have well over 4,000 products. Each product to go through qualifications takes about eight to nine months. That cost is very costly. So that's if we slow down and the demand slow down, so we don't have to qualify as fast, okay? The cost will be spread out.

[Bernie Blegen, VP and CFO at Monolithic Power System Inc]

Those costs are borne in our R&D expenditure line.

[Melissa Fairbanks, VP and Equity Research Analyst at Raymond James]

Okay, great. That's very clear. Thanks very much, guys.

[Genevieve Cunningham, Marketing Communications Manager at Monolithic Power System Inc]

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

[Bernie Blegen, VP and CFO at Monolithic Power System Inc]

Thanks, Gen. I'd like to thank you all for joining us for this conference call and look forward to talking to you again during the fourth quarter conference call, which is likely to be held in early February. Thank you, and have a nice day.

Participants

Executives

• Michael Hsing, Chairman of the Board, President, and CEO

Analysts

• Alex Vecchi, Senior Publishing Analyst at William Blair
• Bernie Blegen, VP and CFO at Monolithic Power System Inc
• Genevieve Cunningham, Marketing Communications Manager at Monolithic Power System Inc
• Jeremy Kwan, Associate VP and Equity Research Analyst at Stifel
• Matthew Ramsay, Managing Director and Senior Semiconductor Analyst at Cowen
• Melissa Fairbanks, VP and Equity Research Analyst at Raymond James
• Quinn Bolton, Managing Director and Equity Research Analyst at Needham
• Rick Schafer, Managing Director and Semiconductor Equity Analyst at Oppenheimer
• William Stein, Managing Director and Senior Analyst at Truist