Monolithic Power Systems Q2 2022 Earnings Call Transcript

Quartr
Provided by Quartr
August 1, 2022

There are 9 speakers on the call.

Operator

Welcome, everyone, to the MPS Second Quarter 2022 Earnings Webinar. Please note that this webinar is being recorded and will be archived for 1 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 Singh, CEO and Founder of MPS I'm Bernie Blagan, VP and CFO. In the course of today's webinar, we will be making forward looking statements and projections that involve risk and uncertainty, which could cause results to differ materially from management's current views and expectations.

Operator

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 latest 10 ks 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 and D and SG and A expense, operating income, other income, income before income taxes, net income and earnings on both a GAAP and a non GAAP basis. These non GAAP financial measures are not prepared in accordance with GAAP and should not be considered as a substitute for or superior to measures of financial performance are prepared in accordance with GAAP.

Operator

A table that outlines the reconciliation between the non GAAP financial measures to GAAP financial measures is included in our Q2 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 Blagens.

Speaker 1

Thanks, Jen. MPS achieved Record second quarter revenue of $461,000,000 22.1 percent higher than the Q1 of 2022 and 57.2% higher than the Q2 of 2021. This broad based year over year revenue growth was a result of consistent execution against our strategies. Turning now to the Q2 2022 revenue by market. In our enterprise data market, 2nd quarter 2022 revenue of $65,200,000 increased 53.4% from the Q1 of 2022, primarily due to an accelerated ramp in our data center and workstation computing sales.

Speaker 1

2nd quarter 2022 revenue was up 117.9 percent year over year. Enterprise data revenue represented storage and computing revenue of $122,300,000 increased 26.6% from the Q1 of 2022. The sequential revenue improvement reflected higher commercial notebook and storage sales. 2nd quarter 2022 revenue was up 111.6% year over year. Storage and computing revenue represented 26.5 percent of MPS' Q2 2022 revenue compared with 19.7% in the Q2 of 2021.

Speaker 1

2nd quarter consumer market revenue of 97 point $3,000,000 increased 21.7 percent from the Q1 of 2022. The sequential quarterly revenue improvement was broad based, with particular strength noted in home appliances and gaming. 2nd quarter 2022 revenue was up 27.9% year over year. Consumer revenue that we presented 21.1 percent of MPS' 2nd quarter 2022 revenue compared with 25.9% in the Q2 of 20 21. 2nd quarter 2022 industrial revenue of $55,900,000 increased 15.1% from the Q1 of 2022, reflecting increased sales of products for power source and security applications.

Speaker 1

2nd quarter 2022 revenue was up 28.9% year over year. Industrial revenue represented 12.1% of our total Q2 2022 revenue compared with 14.8% in the Q2 of 2021. 2nd quarter automobile revenue of $61,000,000 increased 11.9% from the Q1 of 2022, due primarily to increased sales of applications for advanced driver assistance systems, the digital cockpit and lighting products. 2nd quarter 2022 revenue was up 25.3% year over year. Automotive revenue represented 13.2 percent of MPS' Q2 2022 revenue compared with 16.6% in the Q2 of 2021.

Speaker 1

2nd quarter 2022 communications revenue of $59,300,000 was up 6.7% from the Q1 of 2022. Most of this sequential revenue increase was related to 5 gs Infrastructure. 2nd quarter 2022 revenue was up 58.3% year over year. Communication sales represented 12.9 percent of our total Q2 2022 revenue compared with 12.8% in the Q2 of 2021. Moving now to a few comments on gross margin.

Speaker 1

GAAP gross margin was 58.8 percent, 90 basis points higher than the Q1 of 2022 280 basis points higher in the Q2 of 2021. Our GAAP operating income was $141,900,000 compared to $96,100,000 reported in the Q1 of 2022 60.6 $1,000,000 reported in the Q2 of 2021. Non GAAP gross margin for the Q2 of 2022 was 59.0 percent, up 70 basis points from the gross margin reported for the Q1 of 20 22.70 basis points higher than the 2nd quarter from a year ago. The quarter over quarter and year over year increases in both GAAP and non GAAP gross margin is attributed largely to operational to efficiency gains and a more favorable sales mix. Our non GAAP operating income was $179,400,000 compared to $133,600,000 reported in the Q1 of 2022.

Speaker 1

Let's review our operating expenses. Our GAAP operating expenses were $129,100,000 in the Q2 of 2022 compared with $122,700,000 in the Q1 of 2022 $103,600,000 in the Q2 of 2021. Our non GAAP Q2 2022 operating expenses were $92,700,000 up from the $86,600,000 we spent in the Q1 of 2022 and up from the $70,300,000 reported in the Q2 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 loss on an unfunded deferred compensation plan. For the Q2 of 2022, total compensation expense, including approximately $1,200,000 charged to cost of goods sold, was $42,900,000 compared with $39,800,000 recorded in the Q1 of 2022.

Speaker 1

Our Q2 2022 GAAP other income, other expense was $5,100,000 compared with 634 $1,000 in the Q1 of 2022. Our 2nd quarter 2022 non GAAP other expense was $7,000 compared with non GAAP other income of $1,600,000 in the Q1 of 2022. The decrease is due to a $2,000,000 increase in charitable contributions, Partly offset by the favorable impact of currency exchange rates. The difference in non GAAP other income And GAAP other income is the income or loss on an unfunded deferred compensation plan. Switching to the bottom line, 2nd quarter 2022 GAAP net income was $114,700,000 or $2.37 per fully diluted share compared with $79,600,000 or $1.65 per share in the Q1 of 2022 $55,200,000 or $1.16 per share in the Q2 of 2021.

Speaker 1

2nd quarter 2022 non GAAP net income was $157,000,000 or $3.25 per fully diluted share Compared with $118,300,000 or $2.45 per fully diluted share in the Q1 of $2022,86,500,000 or $1.81 on a per fully diluted share in the Q2 of 2021. Fully diluted shares outstanding at the end of Q2 2022 were $48,300,000 Now let's look at the balance sheet. Cash, cash equivalents and investments were $814,100,000 at the end of the Q2 of 2022 compared with $775,900,000 at the end of the Q1 of 2022. For the quarter, MPS generated operating cash flow of approximately $105,200,000 compared with Q1 2022 operating cash flow of $107,400,000 accounts receivable ended the Q2 of 2022 at $125,500,000 representing 25 days of sales outstanding, which was 4 days lower than the 29 days reported at the end of the Q1 of 2022 and one day higher than the 24 days in the Q2 of 2021. Our internal inventories at the end of the Q2 of 2022 were were $359,600,000 up from the $311,000,000 at the end of the Q1 of 2022.

Speaker 1

Days of inventory of 172 days at the end of the Q2 of 2022 were 6 days lower that at the end of the Q1 of 2022. Historically, we have calculated days of inventory on hand as a function of current quarter revenue. We believe comparing current inventory levels with the following quarter's revenue provides a better economic match. On this basis, you can see days of inventory of 162 days at the end of the Q2 of 2022, which were 13 days higher than the 149 days at the end of the Q1 of 2022 and 44 days higher than the 118 days at the end of the Q2 of 2021. I would like now to turn to our outlook for the Q3 of 2022.

Speaker 1

We are forecasting Q3 revenue in the range of 4.80 $500,000,000 GAAP gross margin in the range of 58.4% to 59.0 percent non GAAP gross margin in the range of 58.7% to 59.3 percent total stock based compensation expense in the range of $42,800,000 to $44,800,000 including approximately $1,300,000 that would be charged to cost of goods sold.

Speaker 2

GAAP R

Speaker 1

and D and SG and A expenses between $136,200,000 $140,200,000 Non GAAP R and D and SG and A expenses in the range of $94,700,000 to $96,700,000 litigation expense in the range between $2,300,000 $2,700,000 interest and other income in the range from $1,300,000 to $1,700,000 before foreign exchange gains or losses fully diluted shares in the range of 47,900,000 to 48,900,000 shares. In conclusion, we are continuing to execute on our growth strategies, including the expansion and diversification of our R and D centers and manufacturing that we are pursuing partnerships in multiple countries. I will now open the webinar up

Operator

for questions. Thank you, Bernie. Analysts, I would now like to begin our Q and 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 Rick Schafer of Oppenheimer.

Operator

Rick, your line is now open.

Speaker 2

Thanks and congratulations you guys for another great quarter. This may seem like a silly question given the guidance, but I'm just curious, are you seeing any impact from the delayed launch of Sapphire Rapids? I mean, I know your accelerator content is a lot higher than your CPU core power content. I think 48 volt, and please correct me if I'm wrong, I think our math shows 48 volt tracking to sort of $100,000,000 this year. So I guess I'm just looking at sort of the puts and takes.

Speaker 2

I know it's this is a pretty much a monster guide, but I just was curious if you were seeing any drag there from that delayed launch.

Speaker 1

So far, we see for the next year or so, all our growth is these are as you know, these are all greenfields, okay? I mean, we don't All the products that we're designing in the last few years in the Camryna for whatever The version of it, okay. And so if there's a delay, the one thing is that we actually care less. And it's out of NPS controlled. And but overall, we have a higher power processor and NPS can provide much higher benefit to those market segments.

Speaker 1

So it's all for about half years and a year, again, And we don't notice it as in this period. And we we gain more market shares and we grow from this existing business, we have plenty of to growth.

Speaker 2

Thanks a lot, Michael, for the color. And if I could follow-up maybe on The supply question, majority of your wafer supply is still in China, plus you've got your big Chengdu Back in facility. So I guess how concerned are you with trying to derisk supply chain As we keep watching headlines with the U. S. Government trying to tighten restrictions, etcetera, on equipment and everything in China.

Speaker 2

So just curious your thoughts there. And maybe as part of that, if you could talk about where things stand now with TSMC and give a sense maybe of timing and capacity plans there? Thanks.

Speaker 1

Yes. We just like any other companies, okay, clearly, we're transitioning from the last 20 years of manufacturing from China to other places And all these infrastructure had to be built up and we're just like Other companies, we're in the transitions. Actually, we started transitioning earlier. We first started from our engineering manpower, okay, we transitioned out 6, 7 years ago and 6 years ago and manufacturers like we started like 2 about 3 years ago. And as you know, We always use the trading edge of DRAM fabs, okay, or digital fab.

Speaker 1

And 3 or 4 years ago, clearly, some okay, with these higher node, 60 nanometers and the 40 nanometers and the fabs, okay, they're all engaged with the NPS, okay? And as we have a reputation, so we will fill up all these fabs. And now it opens up in careers and I mean, Taiwan's And these are the places now, okay, we're only talking about the fab, this one now. And In the next few years, okay, we'll be I can't say it's more out of China, okay, we and still bigger And we have a large market segment in our 30% of our revenues still From China. So in the next year or couple of years later, next year, it probably will be a very diversified.

Speaker 1

And just to add to that, as the capacity restrictions are becoming less of a concern for the market in general, Customers are asking for diversification as in a China plus 1 strategy. So we're working along those lines in companion to expanding our overall capacity. Yes. They all require each regions and they're required that they are local supplied. That's what we're playing the games.

Speaker 1

And again, that's our customer request. And so we are fully aware of that. And so we engage with all these fabs Across South Asia and Europe and Korea And Japan. And so that's how I see it.

Speaker 2

Thanks a lot for the color. Congrats again.

Operator

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

Speaker 3

Thank you very much, guys. Hopefully, you can hear me okay. Congratulations on the results. So I had two questions and I'll just go ahead and ask them both at the same time, because I think we've got multiple calls going tonight. The first one, Michael, both in the server business, so the new Enterprise Data segment and in the PC business, could you give us some indication of how far ahead of the unit sales to your Power, your core CPU power or accelerator power products actually sell in versus the unit shipments that get reported by the end customers.

Speaker 3

And Bernie, the second question completely unrelated like $800,000,000 in cash give or take. If you could kind of walk us through some of the uses of cash there, I'm sure Michael would like to build some inventory, which is kind of always the case. But if If you have any new things to say there, that would be really helpful. Thanks, guys.

Speaker 1

Well, firstly, your first question, honestly, I Don't really know, it's difficult. And as you know, we sell These are building blocks and for more or less in the server and data centers areas, okay, and these are more generic parts And they can be used multiple way and it's hard to track. And frankly, we don't really care. And as long as we our revenue goes up, right? And for very high powers and these are powers like 48 volts of powers, okay, we do have pretty good dominant players, Okay, in that segment.

Speaker 1

And so the I think the ramp hasn't really just started Recently, I mean, will be in the future, there will be a lot more. But you mentioned about notebook, Okay, I mean, we're mostly in high performance gaming or mostly In the commercial notebook and number of assets And versus the CPU versus the CPUs is also how to match And because we're selling these Apollo devices, they can be they can be 2 phase, they can be 3 phase, they can be 4 phase, okay, I mean we don't quite note, okay, I mean and also we care less. And so it's difficult to answer it. So all these notebooks are all the high end, like in high end gaming site and the gaming Notebooks and commercial. And so these are the ones that they have a variety of use.

Speaker 1

And on the issue as far as our cash position, which let's put it on the table, it's sort of an enviable position to have over $800,000,000 of cash and cash equivalents. And there's probably three things that we look at. The first is we've been consistently paying out a that we're paying out a routine dividend. This year, it's $3.75 per quarter, $3 for the full year. And we're evaluating the sustainability at a higher level.

Speaker 1

We generally announce dividend increases in February companion with our Q4 operating results, and we'd expect to do so again this year. Another area that We found is very key and strategic to us is building out capacity. And we're looking, as Michael said earlier, For different avenues in order to build out additional capacity and in some cases that may require additional investment. And then finally, as you also added is working capital and making sure that we have adequate inventory on hand in order to sustain our customers' demand profile. And so right now, we're still below our target of 180 to 200 days of inventory.

Speaker 1

So we'll continue to be investing in inventories as well. Yes. I might as well, all these Bernie add, all the expenses, they are small. Yes. Compare relatively compare The cash that we generate every year.

Speaker 1

And so what we want to do is that's probably NPS know the best, be consistent. And we give increase our revenue And that's what we have been doing in the past few years And we'll continue to do so. And also, we don't want we will do some acquisitions, but not

Operator

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

Speaker 4

Great. Thanks for taking my question. Congrats on the great results and outlook. Something I tend to ask about is traction in the module business, Because I know that this is something that's helping boost the revenue growth and the margins, I'm hoping you can maybe update us on the traction in that business, please.

Speaker 1

Yes, the modules are doing well, But the revenue is still quite small, so it's $100 some 1,000,000 but I know the next Few years, we'll grow double or triple it. And that's what we've seen In the pipeline, in the design win activities. And So as we said, okay, a few years ago, we do e commerce and we do programmable modules. That these are show true benefits to our customers truly realize ABN. Yes, I'd say that particularly as we've had this supply demand imbalance And our customers are also looking for enabling technologies that the decision Process for earning a design win where historically had been just on the lowest cost provider.

Speaker 1

Now things like the programmability, the flexibility, The time to market, total cost of ownership are taking a larger weighting in the decision process, we feel like we're very strategically positioned to take advantage of that change in the market.

Speaker 4

That's great. And as a follow-up, if I can, I'm wondering if you can talk about your lead times now and how they might have changed in the last, I don't know, a couple of months and to the degree to which that's been a competitive advantage, my understanding is that you're offering Lead times that enable customers to switch away from competitors' products that have lead times that are so long that it Certainly makes sense to switch. Any sort of comments or update on that would help a lot. Thanks guys.

Speaker 1

Our lead time really hasn't changed much and we're still under a lot of delinquencies, Okay. And that's good things, okay, because as Bernie said earlier, in All the benefits of our product technologies, okay, finally our customers realize it and it became a high demand. And even though and I think it's due to the new design win activities And they all switched to this type of new technology or new design methodologies. And that will that really benefit MPS. And at the same time, We had to increase our capacities, okay, I mean, not only from China, but Globally, that's what our customer demand.

Speaker 1

Yes. And just to top off that answer is that I don't think our lead times were necessarily different from anybody else necessarily in the industry, but we had the advantage of having so many new products coming down the market greenfield opportunities that we invested ahead of the curve and that's where we were able to have product availability when others didn't. Thanks, guys. Yes.

Operator

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

Speaker 4

Hey, guys. Congratulations on the nice results. I guess I would love to ask, obviously, we've seen Some in the compute space Intel and Micron offering much more subdued outlooks for the second half. I think there's clearly some inventory purge Going on in the channel and I'm just wondering obviously your September guidance is very strong, but as you look at the order book, have you started See any changes in the notebook or compute and storage and enterprise data center segment that might echo some of the comments

Speaker 1

we for the notebooks, okay, and for our side, still demand is still pretty good and still good in market demand. And I think it's the orders and the orders slowed down for memory sites and there is a lot of new format starting. We are still facing shortages now. Yes. And if I could just add to that is that we are looking at any areas of our business that might be susceptible to either backlog that is canceled or is pushed out.

Speaker 1

And keep in mind that cancellations are always a part of All semiconductor companies, it's not just a one time or a new event. And the fact of the matter is that any influence relative to the size of our overall backlog today is very minor. And so that's what's given us very confident outlook for the second half. The rate of a booking and the rate of a cancellation is like, I would say, very similar in the last few years. Yes.

Speaker 1

I mean, last few quarters, yes.

Speaker 4

Yes. So no noticeable uptick in cancellations or push outs, it sounds like, is what you're saying? Yes. Got it. The second question is just enterprise data showing very strong growth, and I think that's going to be one of the biggest drivers for the business over the next Couple of years given the greenfield opportunities and just can you guys size for us is the accelerator card and 48 volt opportunity Larger than the share gain on CPU power, do you think they're both equally sort of driving the growth?

Speaker 4

I'm just trying to sort of what's the biggest Driver do you think for the enterprise data set?

Speaker 1

I think it's a both. And not only The CPU size for the servers, And we gained the market share, we stepped into the in that game, like a couple of years ago, But a very small percentage and we start to ramp, but we're still 4th distance than these bigger suppliers. And that's from the server side. And the 4 dables, as you know, we talk about it. And we talk about since 20 'seventeen or 'eighteen.

Speaker 1

And we said that this is the inevitable trend. You had to move up to 48 volt. And we are now in the forefront And we're not replacing anybody. We set up this market trend. And also in the data center and the rack itself, there's a big opportunities, NPS ramping our revenue from there.

Speaker 1

From the AC Powers and these are 380 volts and okay, 240 volts input convert into 48 volts And also the battery backup, we provide the We provide solutions for battery management and also Cooling site. And so MPS is almost a one stop shopping place for data center.

Speaker 2

Thank you, Michael.

Operator

Our next question is from Tore Svanberg of Stifel. Tore, your line is now open.

Speaker 5

Yes. Thank you. First one for Michael. Michael, you're known for driving a lot of new innovative business models. And as we now start to think about adding capacity to get to 4,000,000,000, given the geo And I know you've talked a little bit about this, but are you thinking or working on new business models To try and secure more capacity for your continuous growth.

Speaker 1

Well, there's one thing, right, so much. We do Of course, we have to the fab, we have to move out and we will have increased More capacities outside of China. We started about couple of years ago, more than couple And now we engage with some bigger DRAM fabs, okay, and we will fill that up in the next couple of years. And but going to futures, MPS actually require less semiconductors. And because a lot of products are more programmable and we can use it for multiple use, okay.

Speaker 1

And same time, we're growing our revenues, okay, we're selling a lot more than semiconductor. We're selling power solutions, more modules. And so we kind of move up the full chance, okay, as the new requirement comes in, okay, we play in a market. We're not competing with anybody and we just provide the solutions. And So those are manufacturing, these are clearly different, they're building modules.

Speaker 1

And we signed up Partnerships, okay, for assemble these new modules and is unprecedented and a lot of testings, a lot of qualifications, NPS designed the whole system From the ground up. And so these are the it's and there is no such a facility out there. So we have to invent Yes. And I think just to echo a point there is if you look at our revenue The quarter, we grew 57%. And keep in mind that we've had one price increase And that was in February this year for 5%.

Speaker 1

And so if you actually look at where the source of revenue growth came from, about half of it is volume related and the other half is higher ASPs because of higher value products that we're selling. So that means that we've differentiated our supply chains. We're not just dependent on silicon based products. It's On making total solutions. But these are the bigger effect and hasn't really taken place yet.

Speaker 1

That will be a couple a year or couple of years down the road, you will see much bigger effect. And So there is a lot of the new lot of work to do ahead of us. And these are particularly these are new type of modules. Nobody else built that kind of things, okay? We're ground up.

Speaker 1

We developed and we even Develop the done manufacturing and as well as testing the qualifications part of it.

Speaker 5

That's a great perspective. Thank you for that, Michael. As my follow-up, and this is related to what you just mentioned there, Bernie, which is pricing. I know you're obviously growing by adding more value And higher ASP products, but you mentioned that 5% price increases. I think it's well documented that your competitors Have raised prices by more than that.

Speaker 5

So I guess my question is just simple that, are you gaining a lot of share Because you didn't engage in as aggressive price increases as some of your customers I mean, your competitors, sorry.

Speaker 1

It's gaining share is a gaining share is difficult to count because gaining share if it's an equal Product is gaining shares in a similar product. And So our price betters, our performance betters, we're gaining shares, okay. Now we're talking about completely different things. And those market segments we want to get in there is less price sensitive, But quality performance, lot more important. And Now, Zen okay, we offer some things that can is a lot more than that.

Speaker 1

And 10 years ago, we said that who do we compete with? And a lot of companies sell controller and the power MOSFET, they are separate. NPS is integrated. And now you're talking about MPS, we our product, okay, even on the silicon side And we have microcontroller, we have a memory, we have a digital, we have a powers. And very unique, how we what do we who do we display is difficult to set.

Speaker 1

And now it's getting to with the use of this type of silicon based Technology, we migrated out. We became a provider of total solutions. So how do we who do we display it and how we gain market share is very difficult to say.

Speaker 5

Yes. No, Sounds like you're displacing more companies now than before. Just one last quick one for you, Bernie. Most companies' DSOs were up this quarter because Of the China lockdowns, shipments being later in the quarter, your DSOs actually went down this quarter. So Can you just talk a little bit about how the China lockdown impacted you?

Speaker 5

I mean, obviously, it didn't impact you the same way, but any other color you can share with us, that'd be great. Thanks.

Speaker 1

No, we really didn't have much impact from the China shutdown. Obviously, we were able to record revenue growth that is well above the industry average. And The concern we might have had is if our customer supply chains got impacted. But we continue to hit our delivery schedules. And if there was an impact, I'm sure we felt some of it, but it was very marginal.

Speaker 5

Great. Thank you and congrats on the strong results.

Speaker 1

Thank you. Thank you.

Operator

Our next question is from Ross Seymore of Deutsche Bank. Ross, your line is now open.

Speaker 6

Thanks, guys. I'll try to ask a question. First question is really kind of a high level one. Over the years, you guys have generally The analog market by maybe 10 or 15 percentage points of growth and gain share, etcetera, etcetera. Even last year wasn't terribly But this year, it seems like that delta probably doubles at least, maybe something more.

Speaker 6

So I do get investors that are concerned that your increased availability versus the peers allows you to ship and then it can be double shipping in response to the double ordering. And so it's a cyclical phenomenon that's Widening that gap. Can you just talk about the reasons you think that gap is sustainable? And then looking forward, do you think that gap We'll continue to grow despite the fact that you're operating off of a larger base.

Speaker 1

Yes. I think what you said partially is correct. Again, me and the other company couldn't ship, okay. We have inventories and okay, we have a capacity But this year particularly, we see things are very different and Lot of product, especially we ship to these Tier 1 companies from industrial side, from automotive side and again Even the data centers, they didn't intend to have NPS has a bigger has a majority as a bigger supply, where that they give us as a backup and to test that out. And in the last years, We ship all these units.

Speaker 1

Our PPA failures, okay, were far better than everybody else. And that's one thing, the quality of quality is everything. And but they took a chance when they have a shortage. And so we proved that. We gave us a Big opportunity, we proved these products as better again, as good as better than our Whatever the parts they designed them out.

Speaker 1

And in the last year and this year, all the new product or the new segment start to grow. And as our product, we can change it. We can reconfigure it. And that will continue to grow. And as we see it, I mean, we cannot handle all the projects.

Speaker 1

And So in the foreseeable future, these products will continue to grow. And keep in mind that we're still facing large delinquencies ourselves. And so we've had to be very Cautious and opportunistic as far as how we allocate our wafer starts in order to meet real customer demand. So I think we've been clear that during the first half of the year, we did a cleanup of double orders and have confirmed, as I said earlier, that the MPS's backlog still remains very healthy. And then when you look at the inventory in the channel, We're at lows.

Speaker 1

It's very lean. And we believe we don't have that the inventory on our customer shelves is likewise, Marylene, because we've only been doing partial shipments There. So as far as the markets, we feel reasonably confident. Obviously, Notebook or some of the consumer could give us we're trying to stay very close to that and evaluate its impact. That as Michael said, a lot of our new growth opportunities are in these large Tier 1 opportunities And it's that secular growth that's really driving it and that's different from just building up in the channel or on customer shelves.

Speaker 1

Yes, I'll come back to your questions. Okay, now you said that you're growing on a large basis, so you grow, okay, it's difficult to grow. That's kind of building everybody's mind, okay. In my mind, I don't have a limit. And the limit is within yourself, what to do.

Speaker 1

And people told me like early, all 2 $100,000,000 is your barriers, okay, dollars 500,000,000 of barriers. Dollars 200,000,000 at the time, it was a barrier one time. It It happened and $500,000,000 it wasn't okay, then people tell me, okay, you're going to grow $1,000,000,000 you're going to slow down, okay? And Our at the time is seriously that was 2017 or 2018, yes, 2017. I actually said it, when we get to $1,000,000,000 we're going to accelerate it.

Speaker 1

And that's at the time, that's how I see it. And now NPS, we're not selling silicon anymore. We're selling lot more than the silicon and why not accelerating the growth? So it's of course, I'm not saying that now, okay, a lot of things still depend on our execution, but only thing is the mindset when not dwell on selling Okay. And selling semiconductor is limited, but you have a lot of service, Engineering manpower, we can our customer can benefit to it.

Speaker 1

That's not that's unlimited almost. And supporting Michael's point there, you might remember 6 or 7 quarters ago, we made the statement that by the end of Q2 2 of 'twenty two that we would have capacity to support $2,000,000,000 revenue run rate. And I think that the key there is the execution and the focus and that's exactly what we've done.

Speaker 6

Great. Thanks for all that color, guys. I guess the hopefully quicker follow-up to all of this as you expand beyond the semiconductor side, you get into, I don't want to say systems, but more Solutions in general, some of the stuff you talked about with the entire rack, the AC to DC, the cooling, all the above. What do we look at the gross margin doing in that? That sounds like higher gross margin business, and I know consistency of gross margin expansion is the mantra that you guys have lived by and delivered on, but it seems like mix would go in a big tail or would be a big tailwind for you going forward From a gross margin perspective, so just talk about what this changing in your revenue mix means, whether it's end market or systems Solutions versus chips to your gross margin.

Speaker 1

Yes. That's kind of things we're going to Of course, I can I always say that we can charge as much as our customers' billables, okay? That's kind of a half BS, okay. And But the reality is, Akeem, I think we'll comfortably stay around this Mid to high 50s and 55% to 60% again in the range. I think that's a sweet spot for us.

Speaker 1

We're not going to print the corners for us to grow to over 70%. And when we get there, we get there. Okay. So far, we don't have headwinds. Okay.

Speaker 1

And I think the opportunity drives the model itself. In the next couple of years, okay, I think we're going to stay around this And as we are now, so okay, maybe move up a slide, listen, okay, I mean, we don't have at least we don't have headwinds. And So after 3 or 4 years, we'll see how we change our models. I would just add that I think that We reported gross margin of 59.0 percent. And as Michael said, somewhere in that area is the sort of sweet spot for our model that allows us also to accelerate our rate of revenue growth.

Speaker 1

So it's something that we'll continue to evaluate. But I think right now, we're very comfortable with this being our model. Yes. Thanks, guys. Congrats again.

Speaker 1

We're not chasing the volumes and they're going down. We're not actually, NPS is not good at chasing a volume. We're not doing These are manufacturing actually NPS doesn't manufacture anything. And the high volume things, that's not NPS full day. Thank you.

Operator

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

Speaker 7

Hi, guys. Thanks very much. I will echo the congratulations on another great quarter. I just had 2 really quick ones for you. First, Could you remind us what your inventory target or ideal levels of inventory would be in order to maybe clear some of the delinquencies?

Speaker 7

And then second, on a somewhat related note, what should we be thinking about for CapEx this year either as percentage of revenue or absolute investment? And then what's the longer term requirements you need in order to meet your demand or your growth plans?

Speaker 1

Good questions. So as far as inventory, keep in mind that being so much Our positioning is around growth that as sort of a risk management decision, we believe that 180 to 200 days of inventory is what's needed so that we can Manage an upside in customer demand, but also, if we end up in an unfortunate situation where we have lots of inventory that aren't sellable that we can compensate for that without having any disruption to our customers' production lines. So I think that it's been difficult to manage delinquencies while increasing inventories in order to support our model, But I think we've done a pretty good job in these really unusual times. And then as far as the capital requirements, I think we've talked in the past as far as what our spending rate is. It tends to be on a quarterly basis can be somewhere between $14,000,000 $15,000,000 per quarter with a lot of that being testing equipment or even if we are purchasing buildings.

Speaker 1

We purchase our On office space. And the first half of this year was a little bit lighter that our normal run rate, but I think 14% to 18% absent a big Building purchase is probably a good run rate.

Operator

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

Speaker 2

If there

Operator

are any follow-up questions, please click the raise hand button.

Speaker 8

Sorry, I was muted. Apologies. I'll start over. Bernie, can you hear me? Michael, can you hear me?

Speaker 1

Yes. Yes. Hi, Alex.

Speaker 8

Apologies about that user error here. I was saying apologies again if someone's already asked this question, but I wanted stand a little bit on Ross' question just in terms of the competitive dynamic and your products being superior to those of the competition as well as more of the solution sale. How do we think about power management in particular and your positioning within the customer as these products become more complicated, you take up more space on the Board. I would assume that those conversations are becoming more tightly coupled and that you guys are becoming more important to the customer in terms of conversation.

Speaker 1

Yes. As a matter of fact, The pharma NPS is not from the beginning. So we don't sell in Ping to Ping Comparables, okay, we in a similar product, and like we offer Actually, we are always of far better product and much compact, much higher efficiencies And as an also cost effective without arm charge on the legs and that's is known for NPS, okay, I mean, in the one time, it's early period of the times, NPS is like a price Okay. What kind of companies? And we actually we didn't that means that we left a lot of dollars on the tables.

Speaker 1

And of course, we're not competing in that market segment anymore. Now, Zenake, we offer either total solutions and If you do if you're mentioning if you're talking about any applications, they need the powers and you're talking about electrical car, MPS can build the whole car and use electronics. And You want to build the data centers. NPS provides the entire product for data centers. And We are mostly there and that's how we sell values.

Speaker 1

And We're not competing on this product competes with that product. We have all software behind it. And WebOS user interface, okay, software, that changes the games, okay? We are not competing We're the product per se anymore. I think an interesting dynamic that we've been observing is that Power management was always an afterthought.

Speaker 1

It was the last thing FD designed your board and you came up with the least bad solution. Now we are introduced at the very front end of the development of an application. And the reason is, is because our power solutions enable our customers to be able to develop higher power solutions than they would otherwise. So that's an interesting twist in the relationship where we're being introduced more earlier to the process and able to jointly come up with the development of shared solutions. As you see as you remember, NPS like 4 years ago, We actually build a car, build a very advanced car and far advanced that any car that you see in the market and with the battery management And same time as all the motor controls, lot more complex than the existing EV.

Speaker 1

And so just for the purpose, we can demonstrate we can do it. And now we can do it 4 years later, actually, we can do a lot more on that. And so that's kind of examples.

Speaker 8

That's extremely helpful. And then Bernie, just one last quick question. In terms of the guidance, any end market that we should think of or how should we think about the end markets in terms of strength versus strongest versus weakest or any notable things to call out?

Speaker 1

Yes. I think that the themes that you're going to be seeing for the next 2 to 3 years are The Enterprise Data and Automotive. Automotive had a relatively slow 1st half, but that was exactly what we had in expectations. There was no surprise there. And we believe that the second half looks very healthy as does the data center.

Speaker 1

Yes. As we see it and okay, as a We don't want to okay, what will we provide, not customer ask for it. Yes, we will do that. We'll ask a customer do that. We should lead the customers, so what you should lead.

Speaker 1

That's the game we are really playing. We're playing ahead of games. And I think that all the power stuff like a 48 volts, we said that this is like it was said in 2017. And okay, This is the futures and we anticipated that. Electrical cars, we anticipated that.

Speaker 1

And so now, Sanukin, we can in the next few years, and we'll see the Very similar things that we'll see if all of these will happen.

Speaker 8

Perfect. Thank you so much. Congratulations again.

Speaker 1

Thank you, Alex.

Operator

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.

Speaker 1

Great. Thanks, Jen. I'd like to thank you all for joining us on the webinar and look forward to talking to you again during the Q3,

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Earnings Conference Call
Monolithic Power Systems Q2 2022
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