Monolithic Power Systems Q3 2022 Earnings Call Transcript

Quartr
Provided by Quartr
October 27, 2022

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.
AI Generated. May Contain Errors.
Earnings Conference Call
Monolithic Power Systems Q3 2022
00:00 / 00:00

There are 8 speakers on the call.

Operator

Welcome, everyone, to the MPS Third 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 by Bernie Blagan, 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.

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 Q3 2022 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 and 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 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 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 Blagan.

Speaker 1

Thanks, Jen. First of all, to Dan, greeting you from Europe. We held our Q3 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.

Speaker 1

MPS achieved record 3rd quarter revenue of $495,400,000 7.5% higher than revenue in the Q2 of 2022 and 53.1% higher in revenue in the Q3 of 2021. This broad based year over year revenue growth was the result of consistent execution against our strategies. Looking at our Q3 2022 revenue by market. 3rd quarter automotive revenue of $87,100,000 increased 42.7% from the Q2 of 2022 due primarily to new platform launches. 3rd quarter 2022 automotive revenue was up 60.0 percent year over year.

Speaker 1

Automotive revenue represented 0.6 percent of MPS' Q3 2022 revenue compared with 16.8% in the Q3 of 2021. 3rd quarter 2022 communications revenue of $72,300,000 was up 21.9% from the Q2 of 2022. Most of this sequential revenue increase was related to the continued Communications Infrastructure Ramp. 3rd quarter 2022 communications revenue was up 61.8 percent year over year. Communication sales represented 14.6% of our total Q3 2022 revenue compared with 13.8% in the Q3 of 2021.

Speaker 1

In our enterprise data market, Q3 2022 revenue of $75,300,000 increased 15.5% from the Q2 of 2022, primarily due to continued strength in our data center and work for the full year of communication. 3rd quarter 2022 revenue represented 15.2% of MTS' Q3 2022 revenue compared with 9.2% in the Q3 of 2021. Q3 2022 industrial revenue of $58,700,000 increased 5.1% from the Q2 of 2022. Q3 2022 industrial revenue was up 12.5% year over year. Industrial revenue represented 11.8 percent of our Q3 2022 revenue compared with 16.1% in the Q3 of in 2021.

Speaker 1

Storage and Computing revenue of $112,900,000 decreased 7.7% from the Q2 of 2022. The sequential revenue decline was primarily due to softening of customer demand for notebooks. Q3 2022 storage and computing revenue was up 63 0.9% year over year. Story to Computing revenue represented 22.8% of MPS' Q3 2022 revenue compared with 21.3% in the Q3 of 2021. 3rd quarter consumer revenue of $89,200,000 decreased 8.4% from the Q2 of 2022.

Speaker 1

The sequential quarterly revenue decline was primarily due to softening of overall demand. Q3 2022 consumer revenue was up 21.1% year over year. Consumer revenue represented 18.0% of MPS' Q3 2022 revenue compared with 22.8% in the Q3 of 2021. Let's talk about the general business conditions. For the prior 6 quarters, we have faced product shortages, especially in consumer storage and computing.

Speaker 1

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 We'll catch up to our target of 180 to 200 days and possibly be higher in the near term.

Speaker 1

In addition, we have over 4,000 different products which are required to support thousands of our customers' applications. On average, our product life cycles exceed 6 to 8 years, so we are not concerned with carrying an inventory level above target. MPS' 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 extended significant effort and made joint investments in the development of multiple leading edge products and applications.

Speaker 1

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 have established MPS as a reliable supplier with 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. 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.

Speaker 1

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 trading restrictions. Our products utilize process nodes in excess of 40 nanometer, which falls well outside the current restrictions. Moving now to a few comments on gross margin and operating income. 3rd quarter 2022 GAAP gross margin is 58.7%, which is 10 basis points lower in the Q2 of 2022 and 110 basis points higher than the Q3 of 2021.

Speaker 1

Our GAAP operating income was $151,900,000 compared to $141,900,000 reported in the Q2 of 2022. Non GAAP gross margin for the Q3 of 2022 was 59.0 percent, essentially flat from the gross margin percentage reported in the Q2 of 2022 and 120 basis points higher than Q3 from a year ago. Our non GAAP operating income was $193,700,000 compared to $179,400,000 reported in the Q2 of 2022. Let's review our operating expenses. Our GAAP operating expenses were 139 point $1,000,000 in the Q3 of 2022 compared with $129,100,000 in the Q2 of in 2022 $109,200,000 in the Q3 of 2021.

Speaker 1

Our non GAAP Q3 2022 operating expenses were $98,400,000 up from $92,700,000 in the Q2 of 2022 and up from the $780,700,000 reported in the Q3 for 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. For the Q3 of 2022, total stock compensation expense, including approximately $1,200,000 Charge to cost of goods sold was $43,000,000 compared with $42,900,000 recorded in the Q2 of 2022. Switching to the bottom line. Q3 2022 GAAP net income was $114,700,000 or $2.37 per share in the Q2 of 2022 and $68,800,000 or $1.44 per share in the Q3 of 2021.

Speaker 1

Q3 2022 non GAAP net income was $170,700,000 or at $3.53 per fully diluted share compared with $157,000,000 for $3.25 per share in the Q2 of 2022 $98,600,000 or 2 point at $0.06 per share in the Q3 of 2021. Fully diluted shares outstanding at the end of Q3 2022 were $48,300,000 Now let's look at the balance sheet. Cash, cash equivalents and investments were $738,100,000 at the end of the Q3 of 2022 compared to $814,100,000 at the end of the Q2 of 2022. For the quarter, MPS generated operating cash The decline in operating cash flow and increase in other long term assets reflected a 100 and $70,000,000 prepaid payment made during the quarter to secure a long term purchasing commitment. Accounts receivable ended the Q3 of 2022 at $153,400,000 representing 28 days for sales outstanding, which was 3 days higher than the 25 days reported at the end of the Q2 of 2022 and 6 days higher than the 22 days at the end of the Q3 of 2021.

Speaker 1

Our internal inventories at the end of the Q3 of 2022 were $397,400,000 up $37,800,000 from the $359,600,000 reported at the end of the Q2 of 2022. Inventory at the end of the Q3 of 2022 represented 167 days, which were 5 days lower and at the end of the Q2 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. On this basis, You can see inventory at the end of Q3 of 2022 represented 189 days, 29 days higher than 160 days at the end of the Q2 of 2022 and 56 days higher in the 133 days at the end of the Q3 of 2021.

Speaker 1

I would now like to turn to our outlook for the Q4 of 2022. We are forecasting Q4 revenue in the range of $450,000,000 to $470,000,000 We also expect the following: GAAP gross margin to be in the range of 58.1% to 58.7% Non GAAP gross margin in the range of 58.3% to 58.9%. Total stock based compensation expense of $37,700,000 to $39,700,000 including Approximately $1,100,000 that would be charged cost of goods sold. GAAP R and D and SG and A expenses should be between $131,000,000 $135,000,000 Non GAAP R and D and SG and A expenses are expected to be in the range of $94,400,000 to $96,400,000 Litigation expense is expected to be in the range of $1,300,000 to $1,700,000 Interest income is expected to be in the range from $1,100,000 to $1,500,000 Fully diluted shares are expected to be in the range of 48,200,000 to 49,200,000 shares. 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.

Speaker 1

We can now focus on growing our long term business. I will now open the webinar up for questions.

Operator

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 comes from Matt Ramsay of Cowen. Matt, your line is now open.

Speaker 2

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

Speaker 1

Yes. We're in a smokeless.

Speaker 2

Yes. Thanks, guys. So, 2 different questions from me, one sort of related to the model and the near term and the other one on a different topic. So the first question, Bernie, if you could help us a little bit, I mean the guidance was a bit light and you talked about some of the macro conditions, but it seemed like weakness was concentrated in the storage and computing segment. So if You could maybe talk about things by segment and what your guidance implies on a quarterly basis by segment.

Speaker 2

I think that would be helpful. And then I have a follow-up. Thank you.

Speaker 1

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. So 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.

Speaker 2

Got it. Great. Thank you for that. Michael, my second question is on the topic of China. And over the last, I would say 3 or 4 weeks since some of the new Commerce and BIS restrictions have come into place.

Speaker 2

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 kinds of things. And then the second part of the question is on your manufacturing footprint. I know it's spread across China, Taiwan, increasingly in Korea.

Speaker 2

We've heard some stories from semi cap companies needing to pull employees out of SMIC, for example, and other places because of these human restrictions. So anything in your manufacturing operations That might be disrupted at all because of some of the China restrictions and how far 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 3 or 4 weeks. So it'd be great if you could just kind of address some of those topics. Thank you.

Speaker 3

Yes. Very nice questions. Okay. I'm glad you asked. What all your concern is, I think most of the people totally misconstrued whatever the regulation is.

Speaker 3

And we do have a presence we have a large presence in within China. This is a U. S. Company, okay, and we're not subject to sanctions at all. We don't have to have people that leave Americans have to leave an NPS office in within China, And other one is manufacturing.

Speaker 3

So, in the last couple of quarters, we When we talk about it, we diversified other China's way and we're starting 5, 60 years ago. And also, I shouldn't mention that we talk about Engineering Manpower, this is NPS started in 2017, And we are in Barcelona now, and we grew the very large team here. And with local government support, and again, we are outside of China. And That's not because of sanctions, because we want to diversify geometrically,

Speaker 1

we will grow into a different region in the same time zones where we give our customers the better support. And just to finish up on Michael's comment there, to be perfectly clear, our technology and our products are not subject to restrictions.

Speaker 2

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.

Speaker 3

It is very convoluted And packaging and also the process wafer manufacturers. And it's very convoluted. We don't have a clear figures now. And but going back to for Bernie's questions and Bernie's answers. Our technologies, we're using 40 nanometer above And the current sanctions is 14 nanometer below.

Speaker 3

And We are far as Bernie mentioned in the script, we are far from the sensitive And that we're using the trading edge we're using that really using the trading edge of a fab equipment. And if I

Speaker 1

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

Speaker 3

be able

Speaker 1

to expand and diversify our capacity, which we talked about, about 3 quarters ago, We're going to go from $2,000,000,000 capacity currently to $4,000,000,000 within the next 2 years, 2 to 3 years.

Speaker 3

These are mostly we're planning that these are outside of China.

Operator

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

Speaker 4

Thanks. Don't want to pile on the export control questions that Matt was just asked, but I had one other clarification. You're at 40 nanometer and above and so you're not directly affected. But my understanding is that to the extent a facility, a manufacturing facility in China Has multiple process nodes, some above 16 nanometer and some below 16 nanometer that that mixed use facility Would be affected. And so I'm just wondering for those Chinese manufacturing facilities, the fab by fab, Are any of the fabs that you're running 40 nanometer and above, do they also produce 60 nanometer and below and might therefore be Affected by equipment and or support restrictions?

Speaker 3

No. These fabs usually, they don't Advanced fabs, okay, these are 14 nanometer below, so they don't share with these Outdated the fabs like a 40 nanometer above. Okay, we're primarily using 65 nanometer. So these are totally different facts.

Speaker 4

Thanks, Michael. That's right. I just wanted to clarify because I know that Yes. As Matt said, there have been lots of questions on this topic. Maybe one for Bernie.

Speaker 4

I know you're not guiding beyond the December quarter, But obviously, the environment is pretty soft right now, especially on orders. And so I guess as you look out beyond December, Can you give us any thoughts as to whether you would see less than normal seasonality in March as some of this weakness It will continue into next year and I guess the offset would be, Model of Power has some pretty, I think, meaningful market share gains both on the server CPU side as well as The data center GPU side, when would you think that those share gains start to kick in and might get you back to normal seasonal, if not better than seasonal patterns.

Speaker 1

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 just the quarter after that. And 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.

Speaker 1

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

Speaker 3

That's our guess And that's how we experience. And I might as well, Adam, you mentioned the CPUs and And CPU power data centers, and MPS is a lot more than that. And You look at Bernie's our the readout script, and you have Automotive and The enterprise data centers and other ones Communications, these are still all of them are growing, except the Consumer related, notebooks, gaming, those type of things. And as everybody aware of, as I mentioned, they are softening. There are swings from shortage to oversupplies and almost overnight.

Speaker 3

And these kind of things that we cannot predict, like I mean, you guys probably predict it better than we know. We just have to react fast. And overall, MTS Business, all these greenfield Products will start to ramp in the last few years. They will continue to ramp.

Speaker 4

Sorry, Michael. I didn't want to shortchange it by only Focusing on the data center opportunities. So, thanks for that color.

Speaker 3

Thank you.

Operator

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

Speaker 5

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. And then again, I have a sort of longer term follow-up question, please.

Speaker 3

For shorter terms, Nakame, here's what we see as Nakame. And For the long cycle longer cycle business, it's continued and because there's no Questions related to price, okay, because all the products, okay, they will last 4, 5 years or even longer. And These products are in the renting cycles. In the shortest cycle consumer related, as I said it earlier, I've got notebooks in gaming and all the other personal electronics. And these ones, okay, they oversupply.

Speaker 3

There's no question we don't have any questions about the pricing. And that probably will come in later, another quarter later, so like it will be a new project design, Okay. That's where we that's pricing Questions and I will start to emerge.

Speaker 1

And Will, you also mentioned backlog, the sort of condition of the backlog overall. And relative to historical norms, we still remain very we're much higher than Happened historically. And 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. So I think that as far as our book of business is looking ahead, it remains very healthy.

Speaker 5

Great. And then the longer term question I tend to ask each quarter about some of the 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 either expand or falter given the current environment. And then Same thing with e commerce. Mike, you've seen more or less of that given the changing demand environment. Thank you.

Speaker 3

Yes. All the products, the modules and the e commerce business, okay, and we don't see any changes And they are discontinued. And that's where the NPS and Future business would be, again, and we're even more diversified than NPS' current business.

Speaker 1

And 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. So that to me is A real clear indicator that it fits in well with our diversification strategy.

Speaker 3

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

Operator

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

Speaker 3

Yes. Good evening. Can you hear me okay? Yes.

Speaker 6

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

Speaker 6

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

Speaker 1

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, and there were probably 3 areas, lighting being one of us, that really contributed to the uplift in automotive in Q3.

Speaker 3

So, is

Speaker 6

this something that we can look at as a new baseline and

Speaker 2

then sort of Like

Speaker 6

a steady ramp from here or should we expect kind of more step functions with each new model year?

Speaker 3

Well, the lighting is in automotive lighting have a variety of things. You have a dome light, you have You have indicators, all kind of indicators, you have signals, then you have a headlight, okay. And So this is the last couple of quarters and as you see stepping up And that's kind of that's a part of a Greenfield product in automotive start to ramp. And the content in the cars, we're growing the content And for the number of cars we have, okay, and just at the beginning, we still have a small very small market here. So it will continue to grow.

Speaker 3

Yes.

Speaker 6

Got it. Great. And 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 the steel? And How different is this from things you have 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.

Speaker 1

Sure. So when you think about the period of the supply demand imbalance that we came out of, We had actually a superior competitive position as 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. So as we continue to expand capacity, we're looking for new opportunities and with existing as well as with new fabs. And so in this instance, We wanted to secure a purchasing agreement that in order that gave us dedicated capacity regardless what the economic environment was.

Speaker 6

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

Speaker 3

Most of let me answer that, Waseem. Okay, most of our modules assembly is outside of China.

Speaker 6

Great. Thank you very much.

Operator

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

Speaker 1

Rick, can you hear us?

Speaker 7

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

Speaker 3

Yes.

Speaker 7

Great. Well, hey, guys, thanks for letting

Speaker 1

me ask you a question. Maybe my first one just on

Speaker 7

supply. TSM, 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, A visual capacity ramp, sort of maybe even get a sense of how much capacity they're going to have for you ultimately And how much of that might be 8 inches versus 12 inches Just trying to get

Speaker 1

a better handle on BIM as a partner.

Speaker 3

Yes, most of them we use a 12 inches and also the advanced process nodes. Of course, that's in the TSMCs, okay. We do use their advanced Note, okay, and these are for microcontrollers, that type of a product, we do use them and these are not at

Speaker 1

all.

Speaker 3

And a lot of these products at So, now we have All the capacity for these new products, mostly these are for automotive and communications. And so now give us a lot more room to grow.

Speaker 7

So Michael, just to kind of get a sense, could TSM be sort of a 10% contributor to capacity In say a year's time or is that too aggressive to kind of think of how quickly they could ramp? On

Speaker 3

the lower side, okay, as we see now.

Speaker 7

Thanks a lot. And then a follow-up, I'm just curious To get an update on silicon carbide progress, particularly traction inverters, I mean, how many customers you're engaging with now and when we might Expect to see initial revenues. I know you've talked about it in the past, Michael, but just kind of remind us what that dollar content for NPS Looks like XEV. And I'm assuming it would be sort of subsystem, but would anything be just screen or would that be sort of module slash in the subsystem.

Speaker 3

Yes. Thank you very much to ask that question, Silke. And Yes. That kind of things, the silicon carbides and the high power modules, okay, that's what we're getting excited about. And we do have our first product and I'll go through the qualification now.

Speaker 3

It's And MPS is not intent to sell as a power device as a power device only in like a power spec only. We will sell within using our Combined with our silicon technology, produce these small modules. And we do have many customers engaged all in the automotive sections and also the large energy storage And as well as BMS, okay, the Call shopping, stations and those kind of things, okay, in the business mode, we don't have any revenue yet, okay, but it will be in the next few years.

Speaker 1

And Michael, just a reminder just sort of

Speaker 7

what it does to the content for you guys or potential content in a car or a vehicle?

Speaker 3

I think the Visa content will be enormous, okay? I don't even have a number that will be in the 50s. And I don't have A couple of $1,000,000,000 opportunity is a small size. It's a very conservative estimate. Just thinking about it, all the power trains okay, power driver trains, all the charging stations, MPS is not going to

Speaker 1

make the cell chip only

Speaker 6

with all

Speaker 3

of the entire systems.

Speaker 7

Great. Thanks a lot for all the color.

Operator

Our next question is from Alex Vecchi of William Blair. Alex, your line is now open. Hey, everyone. Thanks for taking my questions. Barney, maybe one for you just on a housekeeping question around gross margins.

Operator

Can you elaborate a little bit on the down sequential? The only reason I'm asking is in the end market weakness in notebooks and consumer, I would have thought is lower gross margin mix. So anything you can do to help on that and how to think of it going from here.

Speaker 1

Sure, Alex. So there's a lot of ingredients that play into the gross margin outlook And certainly the direct margin by end market is a significant part of it. Another is the amount of, I don't really call it, unused capacity, but the fixed cost that isn't necessarily absorbed by the same volume. So 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.

Operator

Okay. And then similarly to that, I'd just expand on Rick's questions regarding the new FAD partner or TSMC. For you. Do you view that relationship eventually being gross margin accretive or dilutive versus your Chinese partners?

Speaker 3

Well, these are events note and we're moving that towards that in the territories. So these are more microcontrollers and More highly digital content products, okay, and it's different product. And we There is no gross margin issues. We don't go and compete with the price. All the products that we add is more These are values more in the software side.

Speaker 1

And 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.

Operator

Okay. That's really helpful. With that, I'll go back into queue. Thank you. Our next question is from Melissa Fairbanks of Raymond James.

Operator

Melissa, your line is now open. Hi, guys. Thanks very much. We Saw CapEx maybe a little longer term question for you. We saw CapEx dip a little in the Q3.

Operator

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? And then when we're looking at getting to $4,000,000,000 in revenue, What's the path to that ramp and the cadence of the investment needed to get there?

Speaker 3

Well, it's We always if you look at our past, okay, if you look at how we expand Our capacity, what is the what's our investment? And If you look at the past 8, 9, 12 years, it's the same pattern as the next 4, 5 years. And we're not going to over invest. We're not going to less invest it, okay? And So the trend, if you look at it, if you're plotting our OpEx and also the gross rate, And we it should be remained pretty constant.

Speaker 3

In the past 4 years in the past 8 years, in 12 years and in the over the last For the last 2 or 3 years, the growth pattern is really different from previous for 4 years. And whatever the growth rate we have in the next 4 years, you can use the plug in that you can use the same kind of percentage range.

Speaker 1

And Melissa, keep in mind that when we do the fab expansion, the capital expenditures Are borne by our partners, not directly by us. So, when you look at our run rate that Michael is referring to, that's more heavily concentrated in test equipment, which can fluctuate from anywhere between $8,000,000 per quarter to $14,000,000 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 later on and currently there are no investments of any material nature.

Speaker 3

Yes, let me Clarify this a little more, okay, rather than give you the models. You know MPS, we don't own the fab, with the fab equipment. And the cost of associating with Capacity expansion, one is we have to qualify the process. And the large portion of it is to qualify our products. We have a 4,000 over well over for 4,000 products.

Speaker 3

And each product to go through our qualifications, That takes about 8 to 9 months. That's very costly. And So that's if we don't if we slow down and the demand slows down, so that we don't have to qualify

Speaker 1

As far as okay. And so the cost will be spread out. And those costs are more in our R and D expenditure

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

Thanks, Janet. I'd like to thank you all for joining us for this conference call and look forward to talking to you again during the Q4 conference call, which is likely to be held in early February. Thank you and have a nice day.

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