Q1 2024 Monolithic Power Systems Inc Earnings Call

Participants

Genevieve Cunningham; Senior Manager of Marketing Communications; Monolithic Power Systems, Inc.

Michael R. Hsing; Founder, Chairman, President & CEO; Monolithic Power Systems, Inc.

Theodore Bernie Blegen; Executive VP & CFO; Monolithic Power Systems, Inc.

Tony Balow

Gary Wade Mobley; Senior Analyst; Wells Fargo Securities, LLC, Research Division

Matthew D. Ramsay; MD & Senior Research Analyst; TD Cowen, Research Division

Melissa Ann Dailey Fairbanks; Research Analyst; Raymond James & Associates, Inc., Research Division

Nathaniel Quinn Bolton; Senior Analyst; Needham & Company, LLC, Research Division

Richard Ewing Schafer; MD & Senior Analyst; Oppenheimer & Co. Inc., Research Division

Ross Clark Seymore; MD & Semiconductor Analyst; Deutsche Bank AG, Research Division

Tore Egil Svanberg; MD; Stifel, Nicolaus & Company, Incorporated, Research Division

William Stein; MD; Truist Securities, Inc., Research Division

Presentation

Genevieve Cunningham

Welcome everyone, to the MPS First Quarter 2024 Earnings Webinar. My name is Genevieve Cunningham, and I will be the moderator for this webinar.
Joining me today are Michael Hsing, CEO and Founder of MPS; Bernie Blegen, EVP and CFO; and Tony Balow, VP of Finance.
Earlier today, along with our earnings announcement, MPS released written commentary on the results of our operations. Both of these documents can be found on our website.
Before we begin, I would like to remind everyone that in the course of today's presentation, we may make forward-looking statements and projections that involve risk and uncertainty, risks, uncertainties and other factors that could cause actual results to differ from these forward-looking statements are identified in the safe harbor statements contained in the Q1 earnings release and in our latest SEC filings, including our Form 10-K, which can be found on our website. Our statements are made as of today, and we assume no obligation to update this information.
Now I'd like to turn the call over to Bernie.

Theodore Bernie Blegen

Thanks, Gen. We're doing something a little different in today's earnings call. As a detailed recital performance metrics is included in the company's earnings commentary, accompanying the earnings release, I'll use this time to provide just a few comments on our Q1 2024 performance and our outlook before opening the call up to Q&A.
Our financial performance improved in the first quarter of 2024 with revenue up both sequentially from Q4 '23 and year-over-year from Q1 '23, Ordering patterns consistently trended upwards through the quarter. Visibility into the second half of 2024, however, is limited and many of our customers remain cautious.
Despite this uncertainty around the second half of 2024, customer engagement across all of our end markets remains high, and our design win pipeline continues to grow stronger. Additionally, we are continuing to expand our product portfolio and diversify our supply chain globally. We believe both actions position our company for further growth as the market improves.
In summary, we saw consistent improvement through the first quarter, but we continue to be cautious about the second half of 2024 business conditions. Overall, our proven long-term growth strategy remains intact, and we can swiftly adapt to market changes as they occur.
I'll now open the webinar up for questions.

Question and Answer Session

Genevieve Cunningham

(Operator Instructions) Our first question is from Tore Svanberg of Stifel.

Tore Egil Svanberg

Congratulations on this enviable consistency. I have two questions. My first question is on share gains. And historically, Michael, Monolithic Power tends to really accelerate share gains during downturns. And I know there's a lot of focus on Enterprise Data right now, which is 1/3 of your revenue, but -- can you maybe call out some other verticals or applications where you are seeing more share gains in the current downturn?

Michael R. Hsing

Clearly, we just wait -- if we haven't out of this downturn. You see this, we compare the rest of the industries, we're like a 10% up. And -- so that's really a share gained. And so in terms of -- so the rest of vertical market as auto is clearly is the one. We won many sockets in there. And MPS is still small compared to all these established -- our competitors.
And other ones, even other ones -- even the servers and notebooks areas and these are the ones, all gain shares. And the last one is the consumer, as we said it a year ago or so, we gave it up some of the shares because of the capacity constraints. Now, we have a lot more capacity now and you will see some growth in the near future.

Theodore Bernie Blegen

And if I could add one additional comment there is that we've had a number of greenfield opportunities that have been waiting to launch in an improved macro environment. So in addition to the end markets that Michael just referenced, I think that you'll also see share gains in both communications and industrial.

Tore Egil Svanberg

Great. And for my follow-up question and specifically on Enterprise Data, which is now 1/3 of our revenues. There's been some chatter lately about lower power management content in next-generation AI data centers due to liquid cooling and other techniques to lower overall power. Is this impacting MPS broadly? Or is this kind of more sort of a very specific use case in the server power management market?

Michael R. Hsing

All these cooling systems, the new format or vertical powers, MPS involve all of them. And if they transition to those markets, those systems -- and MPS in the same gains, okay? We will gain -- and we will grow with it. Is there any other comment? Tony? Okay.

Theodore Bernie Blegen

No, I think that the point that we've demonstrated, particularly with Enterprise Data is the ability to leverage up content as we go into higher-value technology. For example, the water cooled and vertical represent opportunities, not threats. And if you look down the line not to -- not far out, we'll also be going into rack power as well.

Michael R. Hsing

That's good. Yes, good answer.

Operator

Our next question is from Quinn Bolton of Needham.

Nathaniel Quinn Bolton

I'll add my congratulations on very steady performance in a challenging macro environment. I guess I wanted to follow up on Tore's question on enterprise data. Lots of your competitors making noise about perhaps gaining share at your largest enterprise data customer. I'm wondering if you could just sort of address your latest thoughts on competitive landscape in both lateral power and then perhaps looking forward to vertical power? And then I've got a follow-up.

Michael R. Hsing

Yes. As you may remember, 2016, we have a power curve versus -- the power curve CPU computing capabilities and versus the power densities. And we projected it for 2018 or '19. That would be the crossover point that MPS product. And for those common footprint, driver [mass] couldn't fit into the peripheral powers. That's around 700 watts. If you remember that in 2016, we said that. And at the time, we projected with the CPU was wrong. It's actually turned out to be GPUs. But the power is the power, power densities.
And -- but 2018 or '19 -- and that's pretty much the peripheral power that reach the limit. And now from that time -- and everybody goes to a vertical for even higher power AI computations or learning. So all over these power go to verticals.
And peripheral powers reached the limit. And I can't comment on our competitors, okay, so far, MPS, well, as always, we want to bring the best technologies. And we are not a champion of volumes, okay? We don't do that. We want to every -- whatever we do, we do the best. And not the volumes that we ship.
And -- so when the market became normalized and became a normal -- not like the last couple -- last year or so. And there will be more -- more solution come on board. A lot of our competitors start to copy our products, so be it. That's fine. So we are -- we stick our MPS model, we will have a very diversified growth.

Theodore Bernie Blegen

I think it's important to keep in mind when you look at our history, as Michael just referenced there, that we have always won opportunities due to our innovation. And as we look at the next generation of GPU or TPU or ASIC products that are in this high power end market. We're an enabling technology meaning that at the front of the design cycle, we're consulted, we're integrated, in fact, with the development of the next generation of products. So we believe that strategically that, yes, there will be competitive influences on the market but we want to continue to position ourselves as the leader.

Nathaniel Quinn Bolton

Got it. Maybe just a quick follow-up. Just any comments you guys have on when you think vertical power may go to volume production? Is that something that happens later in '24? Is that not in volume until sometime in 2025?
And then the follow-up, Bernie, is you look at the consensus estimates, the Street's modeled up 9% sequential growth in your December quarter. Your typical seasonality, I think, is down 1% to 3%. Wondering if you have any comments as to that sort of a-seasonal pattern out in Q4? I know you're not guiding out that far, but wondering if you could make any comments about that sort of atypical growth.

Michael R. Hsing

I'll answer the first part of it. And the vertical power is happening now. There's multiple of our customers, they are launching the vertical power now and we are shipping those products.

Theodore Bernie Blegen

Yes. And I'll pick up the second part of your question there is that seasonality, particularly as you are exiting a downturn is hard to predict. And what we tried to indicate with our prepared comments is that there are signs of optimism from the standpoint of improved ordering patterns. But how that translates into the second half is hard to predict.
And so we have more of a profile of the guide that we've given for Q2. But that really as far as the difference between Q3 and Q4, we see them higher than Q2 perhaps. But between the two of them, flattish.

Michael R. Hsing

Yes. We see AI probably still continue to grow and grow very fast rate.

Genevieve Cunningham

Our next question is from Rick Schafer of Oppenheimer.

Richard Ewing Schafer

My congratulations guys, and I just had a couple of questions. The first one just since we're talking about power, and I sort of have a point in one on server CPU power. Some of the new x86 platforms that are due out later this year are pushing 500 watts. I mean is there an expectation? Just like the call you made back in 2016, maybe that was a little premature. But is there expectation that x86 is eventually going to move to 48-volt still?
And if so, I guess, where are we in that transition? How far off do you think that is?

Michael R. Hsing

Yes. Okay. Now since you mentioned 2016, I can go back to earlier. 2014 we were not even -- we were outside the door, in 2016, we can join, we were invited as a guest. And we gave some tokens so you can play it. And so the transitions and from VR 13.5 to 14, then this type -- this time, when these new CPU power, we have a significant market share. That will keep -- and it's not reflected into revenue yet. And once those CPU release, we will gain a significant amount of shares.

Richard Ewing Schafer

And any comment, Michael, on the transition to 48-volt power for X86?

Michael R. Hsing

That we don't -- that's probably -- the higher powers is over 700 watts. I think those will transition to vertical powers. And -- which were ready and other ones below that, we believe, are still using a traditional rack power that came in and use 12-volt supply.

Richard Ewing Schafer

Got it. And just as a follow-up, shifting gears a little bit to auto. I was just curious what your expectations are for your auto business this year? Obviously, that market is under a little bit of pressure near term. But I believe you guys have been pretty open about some of your material share gains.
For instance, with China, within China, ADAS also with some of your top auto -- you with your top auto customer. You've also got some pretty significant share gains, I believe, ramping later this year, but I was curious if you could provide any update there.

Michael R. Hsing

We saw - yes, go ahead.

Richard Ewing Schafer

I just was curious if you could add in there, what your expectations are from -- I know you had a couple of launches that some OEMs delayed in the second half last year, and I didn't know if you still expect it to benefit from those this year. I know that's kind of a lot in one question, but there's a lot going on in your auto business.

Michael R. Hsing

Yes, certainly. We actually care less with the share gain, what the revenue expectations. Of course, we have to prepare all the inventories, okay -- and that's the only thing we care. Whatever this or whatever it is, okay. We want to do -- if we're not -- if we're not the best, we will not win those market segments. And particularly, these are new applications and new features.
So far, we can tell you -- in this year's or end of the last year's, and Chinese EV makers, they produce a lot more. And with those features that we are in, they export it in -- not to U.S., but to the other possible world, they increased somewhere 5 million to 6 million units, okay, million cars. And that's where we see the upside so far.

Genevieve Cunningham

Our next question is from Ross Seymore of Deutsche Bank.

Ross Clark Seymore

Congratulations on the stability. Just a question on the visibility into the second half. I understand the caution, especially given everything going on in the broader market. But you also said that your bookings are improving, the order rates, the engagements, et cetera, et cetera. So is the visibility improving? It's just not as good as it used to be? I'm just trying to reconcile the bookings side improving, but the visibility not.

Theodore Bernie Blegen

Sure, Ross. If we can kind of reflect that over the course of about the last 6 quarters, ordering patterns have been well below whatever we call normal. And when we're seeing improvement, doesn't mean that we're seeing that they have necessarily stabilized or that they're as predictive as when you have like 5 or 6 consecutive quarters of strong ordering patterns. So all we're trying to do right now is remain cautiously optimistic.

Tony Balow

Ross, it's Tony. The only thing I'd probably add on that, right, is really focused on the design win engagement, making sure that pipeline is healthy because it's difficult to call when the market would come back. As Bernie said, it's still pretty choppy. But if we have that strong design win pipeline as well as having the supply chain diversification we were talking about, we're set to take advantage when the markets do come back.

Ross Clark Seymore

I guess as my one follow-up, a near-term question for you. Any outliers in the growth that you're guiding to in the second quarter by end market segments versus the 7% total?

Michael R. Hsing

No. Outliers means like AI stuff, Yes. As I said earlier, we still -- we still see a lot of growth, okay? I mean we are getting -- try to get all the inventory ready, okay, start to go even further, okay, and they even have a lot more upside.

Theodore Bernie Blegen

Yes. If I look sequentially between Q2 and Q1, we do see the continuing demand profile for Enterprise Data. And I think we see also some contribution from Automotive, but the rest of our end markets are pretty flattish.

Genevieve Cunningham

Our next question is from William Stein of Truist.

William Stein

Congrats on the good results, and thanks for the change in format. It's a breath of fresh air.

Michael R. Hsing

And -- you appreciate it. We try to make it life and make it easy for you.

William Stein

I'm hoping you can update us on the progress you pursued to try to diversify your manufacturing geographic footprint and both on the front end and back end? And then I have a follow-up, please.

Tony Balow

Yes, I'll start, and then I'll let Michael and Bernie pick up. So I think we continue to make progress on diversification of our supply chain globally. And so I think that is proceeding as planned. And I think that we're set as customers would ask for that capability that we have it ready for them right now. So I think based on what we said in the past, so I would say no change in the expectation there. So Bernie or Michael, anything you want to add?

Michael R. Hsing

Yes. We built all these capacities our customer demands, okay. There's a few of them that really demand a lot outside of China. So we have more capacity. So that's the comment. Okay.

William Stein

Okay. Let me try a different topic. Some product types that I know have been ramping maybe over a long period of time. One is converter -- data converters, which is a category, there's -- I think there's really one very dominant supplier, but you guys have started to get into that area. And then the other is the modules that you make when these are much more complex and they have many, many chips, I think, in each one. If you can talk to us about the recent growth in those newer categories, that would be helpful color.

Michael R. Hsing

Yes. Okay. Let me answer the first ones, data converter -- data converters are -- it's a technology that we're talking about, we developed in the last few years. And we want design win, we start to shipping products, and -- but however, there's only 1 or 2 products, okay? And now we're going to release a family of a product in less than a year, less than a year time. That will meet a more general market.
The other topic that's when you're talking about -- these modules. Yes, so called e-commerce modules, and we're actually doing well, okay, not exactly the e-commerce we talk about in 2018. And it's going over well over $100 million, okay. I mean -- but these are multi-chip modules is more than $100 million. Actually, all these AI products that we're shipping these all modules. And vertical powers and also the rack powers. We're shipping all these modules. So I -- in the past, I say -- I said and I'm sick and tired of selling silicon only. I want to leverage -- our leverage and monetize, our know-how will sell these power modules sales solutions.

Theodore Bernie Blegen

And I think that we've sort of hit on one of the strategic differentiators between MPS and a lot of our competitors is that we can offer the most flexible architecture of whether it is delivering a module or silicon die, so however the customer wants to build our silicon or modules into their end application, we have the flexibility to do just that.

Genevieve Cunningham

Our next question is from Matt Ramsay of Cowen.

Matthew D. Ramsay

I guess it's my first question. guys, I wanted you to maybe talk a little bit about the content per socket progression that you see for the company in the AI business, in particular, as your -- silicon providers that are driving these platforms make generational transitions there. I think there's a little bit of confusion that the big primary guy in AI is not just launching 1 product, but they're launching 3 different ones that I expect to have slightly different content. And you obviously have other customers there in AI, not just NVIDIA but others.
So if you could talk generally, Michael, about just what you're seeing from a content perspective, generation to generation there? And maybe Bernie, what are the variables on sort of blended content increases that you might see as we move forward?

Michael R. Hsing

Yes. I can't talk about the -- well I don't -- we don't know how our customers -- and these are AI GPU providers, how they use it. I mean, they sell -- they have a different model, they have a different model -- they have a different variety of products. We -- as long as we know, okay, they use some -- they use IC chipping in general for peripheral power and verticals is all more than 700-watt powers, over 1,000-watt power. So these are from modules. And how many modules per CPUs, we have rough ideas, but we don't know exactly.

Theodore Bernie Blegen

Yes. And to follow up on your second point, it's a very content-rich environment for us. It also includes memory, for example, and the CPU process -- processor in addition...

Michael R. Hsing

Or even optical.

Theodore Bernie Blegen

An optical as well. So I think it's really too early to put limits on content availability. In fact, we're finding new areas in order to deploy.

Michael R. Hsing

So far, we just want to handle the growth. All the demand from a memory side from opticals, from even the GPU, CPU powers. And this period is really the growth period.

Matthew D. Ramsay

Got it. That's helpful. I know there's a lot of moving parts. I was going to kind of step back and ask a little bit about gross margin trajectory, it comes up a lot in my conversations. I know you're kind of in that 55% range. I guess, Bernie, what are the puts and takes here? I know there are big customers ramping in enterprise data and there are variables around that.
There's also mix between your segments and where you're sourcing supply from, there's a lot of variables here. So what would -- I mean, are we kind of at a relative floor in the 55% or slightly above range? And what would be the variables that could drive the margin back higher?

Theodore Bernie Blegen

Sure. This is a pretty simple question. So as you know, the range that we target is between 55% and 60%. We demonstrated that during the post pandemic stimulus that our margin was able to go to the higher end of that limit. And right now, for the last couple of quarters as well as our guidance here, we've maintained a non-GAAP rate of 55.7%. And really, what will enable us to go up is a change in the mix of business.

Genevieve Cunningham

Our next question is from Gary Mobley of Wells Fargo.

Gary Wade Mobley

Congrats, and thank you for persistently seeing the expectation. Most of the interesting questions have been asked and answered, but I wanted to touch on pricing trends. I know you don't overlap a whole lot with the analog chip market leader. But clearly, they're being aggressive on price. So maybe if you can speak to the different product groups or business segments that might be affected by that? And as well, just generally speak about the pricing environments for your broad set of products.

Michael R. Hsing

Tony, you want to?

Tony Balow

I'll start and then let Bernie jump in, right, I think what you've heard from us in the past is that for us, because we lead on innovation and we're trying to work on the next-generation platforms and work on where we really have a differentiated advantage to our technology. We're probably less susceptible to pricing than some of the segments that are volume related or might be more mainstream. So I do know there's lots of reports out there about pricing right now. But I'd say right now, that's not impacting us in a way -- that's not impacting us in any way, and you can kind of see that in our outlook. And so Bernie will add some more on that.

Theodore Bernie Blegen

Yes. And fundamentally, part of the issue that's driving prices both additional capacity in China as well as additional capacity that's coming on with a large North American company. And on the cost side, we've always been very, very competitive regardless of the end market opportunity and...

Michael R. Hsing

The cost regardless of what the margin is, we always have to -- we always drive the cost down. I shouldn't give you more than you asked, and it's a little bit from the futures. And so far, have nobody asked the question yet. We saw in the near-term market in the next couple of years, the AI truly trickle down to all applications. not only in the cars, and all -- in the sensors, all these -- in building for the phones and all kind of things trickle down to a different level. And that we see now all kind of activities is going on now.
And we -- there's a lot of design initial phase performing the product ideas. And these are requested from our customers. And we don't see that in the end of the last year, even in the beginning of this year, recently, we see a lot more. So that will drive -- those products definitely will drive the gross margin up.

Gary Wade Mobley

Thank you for that comprehensive answer. Last quarter, your distribution inventory, I think you characterized it -- I think you characterized the distribution inventory as being a little bit above the target level, what is it now? Have you been able to work that down to more of a normalized level?

Theodore Bernie Blegen

Sure. So there's sort of two ways to look at our channel inventory right now. If you keep it narrow to really the AI supply chain, we're trying to keep that elevated so that, that inventory is basically available on demand. But then with regard to all of the other end markets, we've seen it coming down nicely.

Genevieve Cunningham

Our next question is from Tore Svanberg of Stifel.

Tore Egil Svanberg

I just had two quick follow-ups. I'm intrigued by the consumer segment, Michael, I know that's surprising when everyone is talking about AI. But I think this is the lowest percentage has ever been. But you did talk about getting some share there in the downturn. So any particular applications that we should keep an eye on as you start to grow back in the consumer area?

Michael R. Hsing

Yes. Okay. That's good question, I mean, yes, that's -- I said earlier that fell into an unhealthy percentage. We want to have a diversified growth, we neglected our consumers. But on the other hand, is during this period, a lot of our competitors care less about cost. We have less effect, but we did lower the price in the notebook market segment. And that's probably you see it now, we grow the notebook revenues faster than notebook market growth. And these are low-margin products.
But when looking at -- looking forward, audio product. A lot of it related to a consumer product. Maybe, Tony, you can mention -- you can talk about this is okay.

Tony Balow

I'll go and Michael can certainly talk a lot more, but I'd point you back to what we announced last quarter on Axign acquisition. And we really looked at their technology and saw an opportunity to participate in the high-end audio market and MPS's scale and Axign's technology really offered an opportunity to go after customers, and we're seeing some traction in that area. So consumers got a wide base of potential applications, and I think we'll continue to pick our shots where we can sort of really add value with our innovation.

Michael R. Hsing

Yes. I can tell you, we will start to ship in Q3 but -- Axign and MPS together as a bundle.

Tore Egil Svanberg

Yes. That's exciting. And my last question is on communications. It was actually up sequentially this quarter. Everything that we're hearing, of course, is that, that market is still very weak. In your prepared remarks, you said that, that growth was driven by networks. So can you elaborate a little bit what's going on there? Are you actually starting to see that market turning? Or is this just pure share gains?

Theodore Bernie Blegen

It remains a flattish market. I think that in quarter-by-quarter, we're going to see infrastructure go up or down. But the full year outlook is that it will probably be flat with '23.

Michael R. Hsing

I'm betting on the communication market, it will trickle down from the speed, and demand of higher speed will trickle down all these segments. And we have a lot of design wins in 5Gs or in other high speed or Wi-Fi, and we're ready for that.

Tore Egil Svanberg

So Michael, what you mean is AI will trickle down. And as that happens, the comm sector will revive?

Michael R. Hsing

That's right. Yes, it has to. That's no brainer.

Genevieve Cunningham

Our last question is from Melissa Fairbanks of Raymond James.

Melissa Ann Dailey Fairbanks

Michael, I love a no-brainer. I mean -- I love that.

Michael R. Hsing

Yes, I don't need my brain to talk about it.

Melissa Ann Dailey Fairbanks

I'm adjusting my model accordingly. So I know you guys addressed auto earlier, and I know everyone is focused on enterprise data. But I would like to understand better, we're coming up on the model year builds for like model year 2025. I would like to know where you feel comfortable guiding the auto revenue from here?

Theodore Bernie Blegen

Yes. So let me take that one. A lot of the exposure we have with new content is with the EV companies. And so Michael touched on the opportunity, particularly as it relates to Chinese OEMs where we have a good installed base, particularly as it relates to ADAS or autonomous driving.
And those tend not to be as seasonally driven as the internal combustion. So while we're seeing some sequential improvement quarter-by-quarter during the year, we don't necessarily -- we're not looking for that hockey stick that used to occur with automotive sales in Q3.

Genevieve Cunningham

I would now like to turn the webinar back over to Bernie.

Theodore Bernie Blegen

So I'd like to thank you all for joining us on this conference call and look forward to talking to you again during the second quarter conference call, which will likely be in late July. Thank you. Have a nice day.