Monolithic Power Systems Q1 2023 Earnings Call Transcript

Participants

Corporate Executives

• Bernie Blegen, Vice President & Chief Financial Officer
• Michael Hsing, Founder, Chairman, President & Chief Executive Officer

Analysts

• Tore Svanberg, Stifel, Nicolaus & Company
• Nathaniel Bolton, Needham & Company LLC
• Matthew Ramsay, TD Cowen
• Richard Schafer, Oppenheimer Holdings Inc.
• Ross Seymore, Deutsche Bank Aktiengesellschaft
• William Stein, Truist Securities

Presentation

[Operator]

Welcome everyone to the MPS First Quarter 2023 Earnings Webinar. My name is Jennifer Cunningham and I will be the moderator for this webinar. Joining me today are Michael Hsing, CEO and Founder of MPS; and Bernie Blegen, VP and CFO.

In the course of today's conference call, we will make forward-looking statements and projections that involve risks and uncertainties which could cause results to differ materially from management's current views and expectations. Please refer to the Safe Harbor statement contained in 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 our Q1 earnings release and in our SEC filings, including our Form 10-K filed on February 24, 2023 which is accessible through our website. MPS assumes no obligation to update the information provided on today's call.

We will be discussing gross margin, operating expense, R&D and SG&A expense, operating income, other income, income before income taxes, net income and earnings on both, GAAP and non-GAAP basis. These non-GAAP financial measures are not prepared in accordance with GAAP and should not be considered a substitute for 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 Q1 2023 earnings release which we furnished to the SEC and is currently available on our website.

I'd also like to remind you that today's conference call is being webcast live over the Internet and will be available for replay on our website for 1 year alongwith earnings release filed with the SEC earlier today.

Now, I'd like to turn the call over to Bernie Blegen.

[Bernie Blegen, Vice President & Chief Financial Officer at Monolithic Power Systems]

Thanks, Jen. MPS' first quarter revenue of $451.1 million came in about as expected; 19.4% higher than our first quarter of 2022 or 1.9% lower than the revenue reported in fourth quarter of 2022. Our results for the quarter were mixed with weaker quarter-to-quarter demand in our enterprise data and industrial markets, overshadowing improvements in consumer and automotive.

Let's take a quick look at our first quarter 2023 revenue by markets. First quarter 2023 consumer revenue of $63.4 million increased 19.5% from the fourth quarter of 2022. First quarter 2023 revenue was down 20.8% year-over-year. Consumer revenue represented 14.8% of first quarter 2023 revenue compared with a 21.2% contribution in the first quarter of 2022. First quarter 2023 automotive revenue of $105.3 million increased $8.0 million or 8.2% from the fourth quarter of 2022. The sequential revenues increased primarily due to continued acceptance of our highly integrated solutions for advanced driver assistance systems, digital cockpit and lighting applications. First quarter 2023 revenue was up 93.1% year-over-year. Automotive revenue represents 23.3% on MPS' first quarter 2023 revenue compared with 14.4% in our first quarter of 2022.

First quarter 2023 Communications revenue of $67.9 million rose $3.6 million or 5.6% from the fourth quarter of 2022. These quarter-over-quarter increases primarily reflected modest revenue improvements in the 5G infrastructure. First quarter 2023 revenue was up 22.2% year-over-year. Communications revenues represented 15.1% of MPS' first quarter 2023 revenue compared with 14.7% in the first quarter of 2022. In our Storage and Computing market, first quarter 2023 revenues of $119.8 million was essentially flat with revenue recorded in the fourth quarter of 2022, as declining storage revenue was offset by higher notebook sales. First quarter 2023 revenue was up 24.1% year-over-year. Storage and computing revenue represented 26.6% MPS' first quarter 2023 revenue compared with 25.6% in first quarter of 2022.

First quarter 2023 Industrial revenue of $47.5 million decreased $8.6 million or 15.3% from the fourth quarter of 2022. This quarter-over-quarter decrease was due to lower security and power source revenue. First quarter 2023 Industrial revenue was down 2.2% year-over-year. Industrial revenue represented 10.5% of our first quarter 2023 revenue compared with 12.9% in the first quarter of 2022. In Enterprise Data, the first quarter 2023 revenues of $47.2 million decreased $21.3 million or 31.1% from our fourth quarter 2022 due to broadbased weakness in data center spendings. First quarter 2023 revenue was up 10.9% year-over-year. Enterprise data revenue represented 10.5% of MPS first quarter 2023 revenues compared with 11.2% in first quarter of 2022.

I'd like to share some general business observations. During our most recent earnings calls, we highlighted that customers were becoming more concerned with near-term business conditions and that ordering patterns might oscillate; this behavior continued through first quarter of 2023. However, we do see order acceleration for products related to artificial intelligence, autonomous driving and power modules and our customer engagement and design win momentum remains strong across all our markets. Regarding operating expenses, we continue to invest in our operations to support long-term growth. In response to customer concerns, we are expanding and geographically diversifying our global production, operations and our R&D activities.

In summary, we have strong customer engagement, design win momentum and are continuing to invest for the long term, even though timing of the revenue ramp from our customers remains uncertain.

Moving now to few comments on gross margins; GAAP gross margin was 57.4% and 80 basis points lower than fourth quarter of 2022 and 60 basis points lower than first quarter of 2022. Our GAAP operating income was $124.3 million compared with $136.9 million reported in the fourth quarter of 2022. For the first quarter of 2023, non-GAAP gross margin was 57.7%, 80 basis points lower than the fourth quarter of 2022 and 60 basis points lower than in the first quarter of 2022. This downward pressure on gross margin is expected to continue near term as we work through higher value inventory built during the supply-demand balance following the pandemic. Our non-GAAP operating income was $164.1 million compared to $174.1 million reported in the fourth quarter of 2022.

Let's review our operating expenses. Our GAAP operating expenses were $134.5 million in the first quarter of 2023 compared with $130.9 million in the fourth quarter of 2022. Our non-GAAP first quarter 2023 operating expenses was $96.0 million, up from $94.8 million reported in fourth quarter of 2022. The difference between GAAP and non-GAAP operating expense for the quarters discussed here are primarily stock compensation expenses and income or loss from an unfunded deferred compensation plans. For the first quarter of 2023, total stock compensation expense included approximately $1.1 million charge to cost of goods sold -- was $37.0 million compared to $35.3 million reported in the fourth quarter of 2022.

Switching to the bottom line; first quarter 2023 GAAP net income was $109.8 million or $2.26 per fully diluted share compared with $119.1 million or $2.45 per fully diluted share in the fourth quarter of 2022. First quarter 2023 non-GAAP net income was $146 million or $3.00 per fully diluted share compared with $154 million or $3.17 per fully diluted share in fourth quarter of 2022. Fully diluted shares outstanding at the end of Q1 2023 were 48.7 million.

Now, let's look at the balance sheet. Cash, cash equivalents and investments were $919.1 million at the end of the first quarter of 2023 compared to $739.6 million at end of the fourth quarter of 2022. For the quarter, MPS generated operating cash flows of $218.8 million compared with operating cash flow of $52.2 million in fourth quarter of 2022. First quarter 2023 capital spendings totaled $8.9 million. Accounts receivable ended the first quarter of 2023 at $184.3 million or 37 days of sales outstanding, up 1 day from 36 days at the end of the fourth quarter 2022. Our internal inventories at the end of the first quarter of 2023 were $430.8 million, down from $447.3 million at the end of the fourth quarter of 2022. Days of inventory decreased to 204 [Phonetic] days at the end of Q1 2023 compared with 212 days at the end of fourth quarter of 2022. Comparing current inventory levels with the following quarters projected revenue, you can see days of inventory decreased to 203 days at the end of first quarter of 2023 from 212 days at the end of the fourth quarter of 2022.

I would now like to turn to our outlook for the second quarter of 2023. We are forecasting Q2 revenue in ranges of $430 million to $450 million. We also expect the following; GAAP gross margin in the range of 55.9% to 56.5%, non-GAAP gross margin in the range of 56.2% to 56.8%, GAAP R&D and SG&A expenses between $132.5 million and $136.5 million, GAAP R&D and SG&A expenses to be in the ranges of $94.9 million to $96.9 million; this estimate excludes stock compensation expenses but includes litigation expenses.

Total stock-based compensation expense was $38.8 million to $40.8 million, including approximately $1.2 million that would be charged to cost of goods sold. Interest and other incomes expected to range from $3.8 million to $4.2 million before foreign exchange gains or losses and fully diluted shares to be in range of 48.6 million to 49.0 million shares. In conclusion, we remain cautious about near-term business conditions, MPS will continue to focus on business development and investing in infrastructure as necessary to support our long term growth.

I'll now open the webinar up for questions.

Questions and Answers

[Operator]

[Operator Instructions] Our first question is from Tore Svanberg of Stifel. Your line is now open.

[Tore Svanberg, Analyst at Stifel, Nicolaus & Company]

Thank you. I was hoping you could elaborate a little bit more, Bernie, on your comment about the business conditions. Because it sounds like the design win momentum is still very strong. The activity is very strong but you sort of added there was uncertainty in certain ramp-ups. So maybe you could elaborate a little bit on -- especially when thinking about the second half which seems to be a period where industry could potentially recover.

[Michael Hsing, Founder, Chairman, President & Chief Executive Officer at Monolithic Power Systems]

Let me answer my -- Tore, let me answer the first. And -- so you look at all these industries, okay, we -- it's about servers, computing, including industrial servers and AI product that's about 10% of the MPS revenue. And we had a hyper -- we experienced this area really the -- all the entire companies experienced hyper growth, okay, in the last 2 or 3 years. And now the automotive too -- we're about 23% of our business total together and where it's about a 30-some percent. In AI other than, okay -- and across the board other than AI and automotive; and so far we still experienced very heavy demand. Other than that, all these design win activities that happened in the last 4, 5 years and they started to ramp last couple of years. A lot of -- because the reason we have all these inventory, we have expanded capacities and we grow much faster than the average.

And now to answer your question directly; there is -- our customers, all these products during ramp, they have a pause [Phonetic] and they don't know what's coming in the new product and they push out. And so, we just cut in the period which is not bad because in the last 2 or 3 years we have been in unsustainable growth and hyper growth; it's like 30%, 40% year-over-year and that will break the company. And I'm glad to announce we're coming back to the normal and we will ride the global market uncertainties, and we just adapted in the past.

Okay, Bernie, maybe you can add some more detail.

[Bernie Blegen, Vice President & Chief Financial Officer at Monolithic Power Systems]

Okay. I think Michael has really laid out a very compelling case as far as the growth that we've experienced over the last 3 years and also identifying that the automotive market remains solidly intact but particularly in Enterprise Data with the exception of AI that we are seeing lag in ordering patterns and general weakness in other markets. So, I think things to reinforce here is that business model here remains intact. We've built MPS around sustainable growth over the long haul and right now are looking at a quarter where end-customer demand is not picking up as well as we might have anticipated a quarter or two quarters ago. But again, the business model is intact.

[Tore Svanberg, Analyst at Stifel, Nicolaus & Company]

That's great perspective. And as my follow-up, you talked about gross margin coming down very moderately because of higher value inventory. Could you talk about how long you expect that to play out and even some ranges? I mean, I assume maybe you'll get to -- I don't know -- 55%, 56% [Phonetic] gross margin. But any color you can give on how long that lower gross margin would last?

[Bernie Blegen, Vice President & Chief Financial Officer at Monolithic Power Systems]

Sure. And good news here is that cycle times and pricing, both in the fab, assembly houses are coming down. And so we'll be able to participate in the lower cost after we burn down inventory which is currently at about 203, 204 days. So, I would expect that we'll see a downward pressure on margins through Q2 and Q3 and then perhaps a moderation leveling in around Q4.

[Tore Svanberg, Analyst at Stifel, Nicolaus & Company]

Yes. Go ahead, Michael.

[Michael Hsing, Founder, Chairman, President & Chief Executive Officer at Monolithic Power Systems]

Yes. I might as well add and clearly, we see we go into a downturn situation and we don't know, I guess, some segment will grow MPS is because a very diverse companies and some area would be still good. In general, consumer products and even some notebook may come back in the second year. And the point I'll try to make is regarding to gross margins, and as you noted in the past when the industry starts to slow down and again, MPS will be more aggressive in price and to gain more consumer segment of market because it can do 6 months later when you turn the knob we actively pursue those products 6 months later. Those are fast design cycles and you will turn the knob in revenues in 6 months' time; so we care less about short-term gross margins but long-term gross margins is still the same. So we emphasize -- as you know, in the last 10 years or so and we'll still pursue those models. And in the consumer segment, we made a short-term focus in the short-term to maintain the growth [Phonetic].

[Tore Svanberg, Analyst at Stifel, Nicolaus & Company]

Makes sense to me. Thank you.

[Operator]

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

[Nathaniel Bolton, Analyst at Needham & Company LLC]

Hey guys, thanks for taking my questions. Just wanted to follow-up on Tore's question. Really, Michael and Bernie, as you look into the second half of the year, that's normally a seasonally stronger period for the company. Obviously, it feels like there are lots of puts and takes, lots of uncertainty, customers delaying product ramps. But can you give us a sense of how you're thinking about second half of this year? Will you see sort of normal seasonal uptick in September or are you thinking September could be flattish with kind of 1Q, 2Q run rates? Any additional color would be helpful just to try to think about the second half.

[Bernie Blegen, Vice President & Chief Financial Officer at Monolithic Power Systems]

Sure. I think that right now, normal seasonality still applies but in our case, it's a little more muted because so much of our growth in business is attached to new product introductions being made by our customers. So if we look in Enterprise Data in which our major customers or the products that we're supporting have had product delays. And when you look at other aspects of the business, for example, Communications, that's still what I'd refer to as lumpy. It's not necessarily trending in a seasonal pattern; so I think your comment is very balanced and I'm tilting to the new product introductions being delayed probably being a large factor than just seasonality.

[Michael Hsing, Founder, Chairman, President & Chief Executive Officer at Monolithic Power Systems]

Yes. I think we can't say really like a normal seasonality anymore, I mean, we experienced in the past. And you have some segments that grow really well. I mean some segments hit kind of bottoms in the last Q3 -- last year Q4, especially like the notebook side. I mean now you see it's a wakening up. I mean, MPS has won orders in design as those are reference designs and have power solutions. And we see second half, mostly all other rest of our businesses other than AI, automotive, we don't -- we have no clear views; and so that's the short-term.

[Nathaniel Bolton, Analyst at Needham & Company LLC]

Understood. I wanted to follow-up on Enterprise Data segment. Obviously, weaker results; it sounds like some of the products or customer delays are sort of focused in this segment. Do you still think the new server cycle ramps that you get your share of the Vcore Power [Phonetic] management market towards 20%? Is that still a right opportunity to be thinking about long-term, even if some of these customer programs have pushed out by somewhat?

[Michael Hsing, Founder, Chairman, President & Chief Executive Officer at Monolithic Power Systems]

Absolutely, I confidently say that. I mean because we see all these projects has not really fully ramped yet. In the data centers, clearly, you guys know better, I mean now slowed down dramatically. I don't know whether they overexpanded last couple of years and now slowed -- took a pause, okay? We don't have clear views. And what we know from last quarter to Q1 -- Q4, Q1 [Phonetic] to now and kind of slowed out.

[Bernie Blegen, Vice President & Chief Financial Officer at Monolithic Power Systems]

And if I can add to that, again, using -- I know that you're focused right now on short-term as far as second half of the year. But in the GPU space for artificial intelligence, we have a very senior market share position. And as we look ahead to even the next generation, we're in a very good position to take advantage of next generation of GPUs. So we're really still in early stages as far as being to leverage up our position and expand our shares.

[Michael Hsing, Founder, Chairman, President & Chief Executive Officer at Monolithic Power Systems]

Yes, yes. That's I didn't add that part. The GPU part came in the AI side, we have current design wins and as well as next design and the futures we will release by the end of this year or next year. And those MPS products will ramp to this. Earlier, I referred to is that all these data centers, CPU powers or data center power overall and we still have maybe -- just if it's not a single digit, just barely double-digit market shares. And lot of -- and from -- transition from VR13 to VR14, and it's not completed yet; we've won lot of design wins in VR14 and it will turn into revenues.

[Operator]

Our next question is from Matt Ramsay of Cowen.

[Matthew Ramsay, Analyst at TD Cowen]

Guys, I wanted to ask -- I guess two-part question on gross margin and this is sort of -- you guys have been in -- gone from sort of 54%, 55%, 56% on steady cadence of 10 basis points to 20 basis points a quarter and that was amazingly steady. And then during the period of supply-demand imbalance, we jumped up to 58% or so and now we've come back in and you guys discussed that in the short term. But as you look out over next 2, 3 years and you think about our strategy to be aggressive and grow in contrast to some of the opportunities that you have for new design wins and higher content, maybe you could level set us on long-term gross margin. Has anything changed there? And where is the new normal? And I guess, second part of that thought guys -- have you seen any specific price pressures in any markets as some of your competitors maybe get more supply?

[Michael Hsing, Founder, Chairman, President & Chief Executive Officer at Monolithic Power Systems]

Yes. Okay, let me answer your last part first. Any high volume -- our customers have multiple suppliers and they always have price pressures other than last 2 or 3 years. Other than that and they couldn't ship, only MPS who came. Most of the companies have struggled in shipments and MPS, we have less. And so nowadays all the higher volumes as we expected. And in the last couple of years also remember we didn't talk that much. We introduced new technology which is much lower the cost and there will be a fight; so to answer that part of the question. But earlier, I said it, I care less about gross margin lately, okay but we're still operating within the models, okay? We'll not dramatically go down. Clearly, it will go down and -- but in long-term model to answer your question -- 2 or 3 years out, the business -- MPS business is still pretty much intact and we are focused on those high values. We're transitioning from IC solutions to cell solutions; that still remains our focus. Our long-term business will go that way and will generate and offer more value and we have higher gross margins.

[Bernie Blegen, Vice President & Chief Financial Officer at Monolithic Power Systems]

And I think just to polish off the comment there is that as far as our model, we've been operating over last several years between 55% and approaching 60% as far as non-GAAP gross margin. And as we introduce these higher-value products, they tend to have higher margins. And what that allows us to do is manage mix of business such that we stay within our model. So while we sort of anticipated in the near term downward pressure with flattening in the next 3 to 4 quarters, we'll continue to look to be opportunistic and managing gross margin to accelerate revenue growth.

[Matthew Ramsay, Analyst at TD Cowen]

Got it. As my follow-up -- and I apologize for this being near-term question but with all different end-market volatility. Bernie, if you could help us on your guidance by segment, just the revenue trends that you guys see in the June quarter; that would be great.

[Bernie Blegen, Vice President & Chief Financial Officer at Monolithic Power Systems]

Sure. I think that we said earlier in this call.

[Michael Hsing, Founder, Chairman, President & Chief Executive Officer at Monolithic Power Systems]

It's fair to ask short-term question because this is -- very uncertain period.

[Bernie Blegen, Vice President & Chief Financial Officer at Monolithic Power Systems]

So, I think to sort of make a simple point on it is that, Automotive continues to be doing very well and there -- it's both, the market itself as well as the share gains that we're enjoying. I said earlier that Communications is lumpy and other areas including Storage and Compute, Enterprise Data and Consumer and Industrial are sort of flattish for the near-term.

[Michael Hsing, Founder, Chairman, President & Chief Executive Officer at Monolithic Power Systems]

Well, the Storage -- in AI segment and in data center, if we -- Computing segment is -- maybe is flattish, okay. I mean, I think majority of our revenues have come from -- still come from servers. And you see the ramping in the last 18 months or so in the AI and the total portion -- AI in the total revenues is still a smaller percentage. And the other things I'm pointing out, there's memory sections. I mean, they're changing new formats and they start to ramp now. This is the result that we're kind of flattish, okay? I mean it depends on how fast you ramp up to DDR5 [Phonetic]. MPS has -- have engaged with all the major memory companies that we have designs -- we have design wins. And if they ramp up faster then -- and we will -- we will again - we'll increase that portion of revenues. And it's depending on what the DDR5 will ramp up.

[Matthew Ramsay, Analyst at TD Cowen]

All right, okay. Thanks.

[Operator]

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

[Richard Schafer, Analyst at Oppenheimer]

Thanks. I appreciate all the color so far, you guys. Maybe if I could ask one on 48-volt back on the AI for the question. I know you heard you say Michael -- sorry, Bernie said that, I think, he had said senior market share position there. I'm curious with your primary competitor in 48-volt apparently still struggling. I mean are we at a point now if we look at 2023, where you guys think you'll likely stay sort of sole source -- sort of A100 [Phonetic] and H100 this year? And I'm curious as part of that question; I heard you mentioned contents there. So is there any color you can give us around what contents as we transition to sort of more powerful accelerators overtime? I mean is it similar to what you guys have talked about with the move from VR13 to VR14 on Vcore Power [Phonetic] where you're talking about going from sort of $50 a comp sort of to something like $70? And then finally, Michael, for you; I'm really curious, are you -- who else are you seeing out there working on 48-volt power? This seems to be a pretty solid and growing market.

[Michael Hsing, Founder, Chairman, President & Chief Executive Officer at Monolithic Power Systems]

Okay. Let me answer my part first and I'll get in.

[Bernie Blegen, Vice President & Chief Financial Officer at Monolithic Power Systems]

That's more fun part.

[Michael Hsing, Founder, Chairman, President & Chief Executive Officer at Monolithic Power Systems]

From the landscape, I truly say, like -- I mean, we don't -- we see some competition in the game. I think our products remained the best so far. And -- so that's why -- so we have -- and we do see some other competition, maybe as generation later came in. As that market segment grows and competition will come. And like -- I mean, the market is too big for MPS and we welcome other people. And we welcome -- as a matter of fact, that's what we're doing in that, okay. And as MPS is not big enough for that market but we will be glad to be leaders.

[Bernie Blegen, Vice President & Chief Financial Officer at Monolithic Power Systems]

And again, reinforcing Michael's point there is that it actually we enjoy a leadership position and we expect to continue to, competition is very important as far as driving technology improvements. As far as your other question as far as dollar content, when we look at CPU market, generally we denominate it with dual processors. And so based on that we are able to offer expectations of what average selling price will be per server. With GPU's model still sorting itself out where you can have any number of configurations upto including 8 GPU boards; so it's very -- it's a little harder to denominate what our dollar content is. And again, we're still in early stages of watching this model ramp. So I think that we'll have enough experience in about 2 to 3 quarters to have more accurate reads on the dollar content but it's much higher than what we are experiencing with CPUs.

[Richard Schafer, Analyst at Oppenheimer]

And for my follow-up, I'd love to ask you about 5G RAN [Phonetic]. I know you guys have said in the past you're selling to big 3 RAN [Phonetic] equipment OEMs. I'm just curious how you would describe the ramp there in terms of content, in terms of share? And what I am trying to do is get a sense of how big 5G is now versus how big it could be for you guys. And to something you mentioned earlier, Bernie I'm just really curious here, could the ramp in 5G sort of smoothen some of the lumpiness you described in Comm segment?

[Bernie Blegen, Vice President & Chief Financial Officer at Monolithic Power Systems]

Yes. If I was to draw a comparison of experiences with Enterprise Data where we started out with low dollar content and then graduated up the value chain including power management; we're probably about 3 to 4 years behind in Communications market where we're still focusing on low dollar content for -- like point-of-load and E-fuse [Phonetic]. Now where this is about to get very exciting is we are getting adoptions for later designs that include our power management for processors. So at this stage we're sort of moving with the market -- again, as an early entrant. But long-term, I do think you're going to see similar growth profile as what we expect to have with Enterprise Data.

[Michael Hsing, Founder, Chairman, President & Chief Executive Officer at Monolithic Power Systems]

Yes. And immediately now -- I keep saying MPS is a small company but we're not nobody anymore. And we engage with all these customers -- these 5G makers and it's only handful of companies as of speaking now; so we're in process of signing on contracts now, and so all of these -- and it's just a matter of time.

[Richard Schafer, Analyst at Oppenheimer]

Thanks for the color.

[Operator]

Our next question is from Ross Seymore of Deutsche Bank. Your line is open.

[Ross Seymore, Analyst at Deutsche Bank Aktiengesellschaft]

Hi guys. Can you hear me?

[Michael Hsing, Founder, Chairman, President & Chief Executive Officer at Monolithic Power Systems]

We have a high inventory, yes.

[Ross Seymore, Analyst at Deutsche Bank Aktiengesellschaft]

How about the channel inventory; we've heard bunch of companies talked about the channels coming down and that's a headwind to revenue growth. I know you guys proactively manage that. So you put it on your own balance sheet but what's the channel looking like?

[Michael Hsing, Founder, Chairman, President & Chief Executive Officer at Monolithic Power Systems]

It's also on the high side.

[Bernie Blegen, Vice President & Chief Financial Officer at Monolithic Power Systems]

Yes. About 3 quarters ago, we saw an increase in channel inventories and they've remained at about that same level. So there isn't any real new news as far as the sell-through characteristics.

[Ross Seymore, Analyst at Deutsche Bank Aktiengesellschaft]

Is that something that's weighing against your revenue right now? Or are you comfortable running at relatively higher level?

[Michael Hsing, Founder, Chairman, President & Chief Executive Officer at Monolithic Power Systems]

No. We wanted lower and we want to lower, and particularly, in the first quarters and a lot of customer threatens and get much higher volumes, okay? That's why we shipped and they have kind of break [Phonetic]; and as a result, inventory didn't decrease that much in channels.

[Ross Seymore, Analyst at Deutsche Bank Aktiengesellschaft]

So, it went down on your books more so than in the channel?

[Bernie Blegen, Vice President & Chief Financial Officer at Monolithic Power Systems]

Yes. The way to look at another aspect to this is that the inventory in the channel, it depends on what our end customers' lead times are. And as we even commented in the prepared comments, we're seeing very unusual demand pattern in that we have 3 areas where we're seeing acceleration as far as ordering pattern. But they're doing it with a very -- an expectation of having a very short lead time. So as Michael said earlier that the channel is built up in anticipation that the customers are going to realize the sales gains with new products but as those have been pushed out, that left us in this position. So we're going to continue to manage channels as we always have; but right now, as I said, it's at an elevated level.

[Ross Seymore, Analyst at Deutsche Bank Aktiengesellschaft]

Got it. And then one on the gross margin for you, Bernie. When you talked about the headwinds, we see this across the board; so I don't think it's anything particularly different for Monolithic. But one thing you didn't mention was mix. I get that you are carrying higher cost inventory and it takes a while to flush-through. But as you go opportunistically into the consumer market, is that rising as a percentage of sales -- something that is also weighing against gross margins? And if so, when do you think that will kind of normalize as a percentage of sales, if not decrease?

[Michael Hsing, Founder, Chairman, President & Chief Executive Officer at Monolithic Power Systems]

Yes, you can see it as normal because consumer market hasn't happened yet. We reduced -- we've down -- consumer down to the big percentage now, okay. And mostly it's a high-value inventory.

[Ross Seymore, Analyst at Deutsche Bank Aktiengesellschaft]

Got it. Thank you.

[Operator]

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

[William Stein, Analyst at Truist Securities]

Great. Thank you for taking my questions. Regarding something you just spoke about a moment ago, you spoke about elevated inventory and push outs of projects. I think obsolescence risk is relatively small for Monolithic but maybe you can reassure us on that matter?

[Bernie Blegen, Vice President & Chief Financial Officer at Monolithic Power Systems]

Absolutely; actually, very helpful question. If you look at our history, we've never had significant inventory write-offs, and lots of the reasons around that is our products have long life in the market and long shelf-life. So, we're actually -- if you look back at 2019, we built up inventories and we're able to capitalize when the market bounced back in '20 and particularly when the pandemic, infusion of capital occurred. So, we don't see inventory on our balance sheet as a negative; and in fact, when markets do get more stabilized, particularly in Enterprise Data and in Storage and Computing, I think we're well positioned to take advantage of that uplift.

[William Stein, Analyst at Truist Securities]

Great. And then, like -- to sort of ask a double question about supply and supply base. Other analog companies have talked about how their foundries are absolutely not cutting cost and they never see it happening but you've highlighted this trend in your business. Is it because you're on more advanced nodes and so that's just how sort of pricing in that market works? And then, maybe you could also comment on the manufacturing plans, both in terms of long-term capacity and geographic diversity?

[Michael Hsing, Founder, Chairman, President & Chief Executive Officer at Monolithic Power Systems]

Yes. You know that we advance our technology every 2 or 3 years, and we're relentlessly cutting costs and utilize better technologies, get better geometries. The fab -- now in the last 3 years, the fab costs is not lower, higher, as a matter of fact. But we utilized the geometries and also new technologies that we implement; we will be able to lower costs. And so, the other question that you're making is a diversified manufacturing. So, we anticipated that -- again, we announced that we have a new partnership outside of China; that's in Singapore and we will continue to do so. But really outside, there's no U.S. manufacturing for our application, for our product. I mean, it's all resides in Asia, Korea, like Taiwan and Southeast Asia. And in all our module business, we can do it from our side outside of China.

[Operator]

[Operator Instructions] As there are no further questions, I would now like to turn the webinar back over to Bernie.

[Bernie Blegen, Vice President & Chief Financial Officer at Monolithic Power Systems]

I'd like to thank you all for joining us for the Q1 2023 earnings webinar. I look forward to talking to you again during our second quarter conference call which would likely be in July. Thank you. Have a nice day.

[Operator]

[Operator Closing Remarks]