Meera Rao - Chief Financial Officer Michael Hsing - Founder, Chief Executive Officer.

Tore Svanberg with Stifel Vincent Celentano - Raymond James Rick Schafer - Oppenheimer Anil Doradla - William Blair Lena Zhang - Baylock Mike Lucarelli – Evercore Amit Chawla - Wells Fargo.

Good day, ladies and gentlemen and welcome to the Monolithic Power Systems Incorprated Second Quarter 2014 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we’ll conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions).

As a reminder this conference call is being recorded. I would now like to introduce your host for today’s conference Meera Rao, Chief Financial Officer. Please go ahead. .

non-GAAP gross margin in the range of 54.4% to 55.4%, GAAP gross margin in the range of 54.1% to 55.1%. Total stock based compensation expense of $7.7 million to $8.3 million including approximately $200,000 that would be charged to cost of goods. Litigation expenses of $200,000 to $400,000.

Non-GAAP, R&D and SG&A expense to be in the range of $22.5 million to $23.5 million. This estimate excludes stock compensation and litigation expenses. Fully diluted shares to be in the range of 39.5 million to 40.1 million shares before share buyback.

This Q3 outlook validates our overall business model discussed in prior calls as a mid-point of guidance will produce 25% non-GAAP operating margin. In conclusion, as we continue to execute on our growth strategy formulated four years ago, we are delighted to see these early results. I will now open the microphone for questions..

(Operator Instructions). Our first question comes from the line of Tore Svanberg with Stifel. Your line is open..

So my first question is on communications and industrial. It had a very strong quarter in Q2.

And just wondering if that’s what’s going to continue to drive growth in Q3?.

I think it is difficult to comment on quarter-by-quarter, but the overall trend is increase because in the past two or three years we have focused on that segment and we generate a lot of design wins. And these design wins turns into revenues and we see a very steady increase in the next few quarters, and in near future.

So the next quarter will probably follow the similar trend, but it is not exactly a number but overall direction is same..

And on gross margin, you’ve had very nice steady increase now for a while.

And as we look forward, I am just wondering if we should expect that similar improvement? And I assume that it’s primarily mix driven or is there anything else going on there?.

We’ve been saying for a while that our gross margin improvement is going to improve slowly and steadily and that’s exactly what’s spanning out. So we have in the latest quarter Q2, we also had because of the big increase in revenue; we also had a pickup from a better absorption of our test manufacturing capacity that we have, the overhead costs.

Our mix also continues to improve as the new products come out..

Just one last question if I may. Could you update us a little bit on your Monolithic Power Module business? I know that’s revenue primarily is slated for later. But just hoping you could give us an update on reception so far, when you expect more meaningful revenue and so on? Thank you..

We introduced, as you know we have we have a matrix of product, in the last quarter we introduced few more. And as the release of these products are kind of difficult, we had to go through a full qualification; every one of them had made a deal about 2,000 hours, so we gradually complete that metrics.

In terms of our market, reception is extremely well. Our customers and some customers adopted our module very quickly, and some industrial automotive for traditional markets and they follow the similar trend as they do with other business, which takes about 24 months to 36 months to generate any revenues.

But we see a lot of designing activities and there are no surprises..

Our next question comes from the line of Steve Smigie with Raymond James. And your line is open..

This is Vincent Celentano speaking for Steve. I was wondering within your memory and storage business. I was wondering PMIC is looking really strong lately.

Do you see this trend continuing and do you believe share growth is part of that?.

SSD PMIC continues to do well. We expect to see growth in next quarter as some design wins ramp up next quarter, I mean in Q3..

And then within the LED driver market.

I was wondering what’s your shares of that and what you see as the growth drivers?.

In the LED lighting market, this is a market that long-term our interest is industrial and the commercial applications. We are playing in the consumer market right now because it’s a good market and it’s very profitable for us. We’re only playing in key segments of this market and not across the board like some of our peers..

Our next question comes from the line of Rick Schafer with Oppenheimer. Your line is open..

I had a quick question first I think on the Sensima acquisition. I know you talked about being accretive. I think you said on the second half of 2015.

When do you guys expect to see first revs from that business? And in the meantime can you quantify the dilution or is it a noticeable impact?.

I can answer the first part of the question. It’s a small revenue. The key is that we acquire technology, it’s a proven technology and customer accepted it. And so whether you generate $1,000 and $100,000 of revenue, that’s not really important. We see this technology is true revolutionized the motion control.

You have mono drivers, you have robots, you have industrials machineries and automotives. And this is really something nobody else has seen it before. And we are glad to find this company and we can beat all. The founders like MPS, and they turn down all the other offers and they join us..

And the second part of your question Rick. We expect this deal to be accretive by the second half of 2015. .

And then my next question is on mix. Obviously it continues to improve as comps and auto and industrial continue to ramp as a percent.

What’s the right split for your guys long-term between your sort of four main buckets? And I am just curious what gross margins are going to look like once we’ve sort of hit that optimum mix?.

For us the three target markets are computing, communications and industrial, and we’d like to grow those markets as much as we can. We don’t have any internal number that we’ve shared.

And our idea is that as we go out in time, when it comes to gross margin there are no headwinds and basically we expect to show a slow and steady increase in gross margin..

And then just I am kind of curious on TV.

Can you update us on what your TV exposure is now and maybe elaborate a little bit on the content increase story there?.

Sure. It’s roughly about 10% of our business from TV. And I think we talked about this a couple of quarters ago saying that we’ve got more design wins now in TV and this particularly as you see some of the smarter TVs and some of the power requirements are going up. We’re seeing higher revenues here..

But can you quantify? I mean is your average content increasing, I don’t know 5% or 10% year-over-year or any kind of number you could put that there?.

We just focused on that, on the market segment really opportunistic, and some of the newer TVs are smart TV with processor-based TV that requires higher power. And we have product and we have a very cost competitive product and we just take -- in the past we took this bucket. And we have continued to do well in those high current sockets.

And because our competitor couldn’t even match what we do. So in terms of a real percentage of what the growth is I put a very little focus on it. And maybe Meera can tell you what is our growth pattern it..

I think overall what we’ve got is we’ve got more design wins, so you’ve seen the increase in revenue. I would attribute it more to design win increase rather than a dollar content increase..

Our next question comes from the line of Anil Doradla with William Blair. Your line is open..

Michael and Meera I have a kind of big picture question. Obviously consumer business continues to do well. You’ve had some benefits from some of the gaming products.

But when I look at Monolithic Power one of the key transition stories was to step away slowly from the consumer business and diversify to more longer product cycles infrastructure oriented. Last couple of quarters consumers have been good, last quarter has been good.

So how should I be looking at it? Are going to continue working with consumer? But your hurdle rates are going to be based on some higher gross margins? Or I mean can you lay out what the big picture strategy is going forward? And I have a follow up..

Sure, our overall strategy is to go into more and more markets where they’ll pay as a premium for our products. And if you notice some of the newer consumer markets where we have been seeing higher revenues come in the last few quarters. There have been markets that require higher performance, calling for a thinner competitive landscape.

And these are markets like gaming, battery management. These are the markets where we’re particularly seeing our revenues increased. So while those happen to be in the consumer marketplace, it still plays into our overall strategy of focusing on performance and where we get a premium for our performance.

And as you will see out in time, you’re going to see revenue from computing, from communications, from industrial continue to go up. I don’t know if you noticed, but our industrial revenue is about 17% of our revenue. And just about two or three years ago, it was about 6% to 8% of our revenue.

So I think we’re focusing on differentiated products that make a difference to us both from a top line gross margin and bottom line..

And on Sensima Technology, I mean why did you acquire this? Because I am trying to understand the connection between the Sensima Technology and a power management company.

What were the synergies and can you give a little bit more color on that?.

Yes, I’ll give you a longer version answer. Let’s start it, that’s motion control, all the motion controls are consistent with motors in them. And traditionally all the motors -- for the last century all the motors in building a similar technology in the last 10 years to 15 years and require higher performance motors that are using a microcontroller.

So in order to deliver the power accurate and reduced noise and vibration of the motor, these are considered high performance and much costly. In Sensima Technology we can deliver higher performance motors.

By using the Sensima Technology the motors performance will increase greatly and considered even better than any motor drivers in the market now with the microprocessors. So this is a very low cost solution. We can revolutionize the entire motor drivers.

So you offered using this solution in lower performance motor can be even better performance than existing high performance motors. So that’s the reason, one of the reason we acquired them..

And finally BCD3, can you give us a sense what was the contribution and how did that grow during the quarter?.

BCD3 and 4, the revenues continued to be about 50%..

Our next question comes from the line of Lena Zhang with Baylock. Your line is open..

So the Company has done real good job on the diversification in the end market, and I believe will continue.

How has that impacted your sales in different ranges and how well that impacts as well?.

Essentially, we have done a lot of sales using our existing sales force. And if you noticed in the last few months we’ve announced at least two distributors who will increase the number of boots on the ground, and we believe will lead to future growth and revenue as well.

And as you pointed out, we have a broad breadth of products and this just takes the revenue to the next level..

But in another words, so how should I expect which region will grow faster than others?.

That’s hard to tell, but irrespective way the demand is created almost all the manufacturing ends up in Asia. And if you notice the numbers we report on the sell through region, and so you are going to see Asia revenues grow anyway. But that does not necessarily mean that the demand was created in that region.

So it’s kind of hard to answer the question..

To answer your question in the industrial market, automotive market takes 2 years to 3 years. So you add more people, the result will be better two years to three years later. It doesn’t change the pattern but change the numbers..

And in terms of the acquisition of Sensima and is your Q3 guidance -- does your Q3 guidance include OpEx from that, because of the acquisition?.

Yes, we included about, I think just a little under $500,000 in Q3 for the operating expenses of Sensima..

(Operator Instructions). Our next question comes from the line of Mike Lucarelli with Evercore. Your line is open..

If I look at guidance for 3Q, how does that breakdown by end market.

Maybe like I was thinking about which one should go faster or slower than the midpoint of your guidance?.

As I’ve said before when we look at the granularity of the forecast data, it’s not at the same granularity as we get when with actual data. So I can’t comment segment-by-segment, but I can talk about a few drivers that I see that are going to be doing very well for us, SSD for once, we’re going to see growth over there.

I expect to see that gaming is going to do well; we’re going to expect to see growth in battery management or in LED lighting. In TV we will continue to see progress over there. I think industrial particularly automotive most probably is going to be a growth for us if you are comparing Q2 to Q3..

What about the design wins you had in server and PC? How is that shaping up?.

In servers we’ll be shipping this quarter and next quarter for revenue. In terms of -- in computing on the notebook side. I think the market is shifting from [shock bay] over to [crescent bay] and we are positioned to do as well if not better in the [crescent bay] than [shock bay]..

The consumers market we expect to do well in the next two to three quarters or even beyond. So you will see some significant changes in the next couple of quarters..

And then I guess back into the storage PC bucket. That was only one that was down year-on-year.

What are the moving pieces within there, is that ACGs falling off a little bit?.

No, it was actually one of the SSD design wins ramp down. But the successor design win ramps up fairly strongly for us next quarter. So it ended up being flat this quarter. I mean computing was flat but SSD within was a little down. But we are going to see that portion go up again in Q3..

Our next question comes from the line of Amit Chawla with Wells Fargo. Your line is open..

I just had a quick follow up question.

I guess what percent of your industrial revenue at the moment stems from automotive solutions? And I guess what percentage of your industrial mix do you expect automotive to be exiting calendar year ‘14?.

I would say industrial is an area where as I have said before there are multiple markets that make up that portion. Automotive is one of the market that is growing for us. I don’t think we have disclosed in the past what portion of industrial is from automotive..

But automotive will be a very significant number, so from this year and going out of this year in to next year. So we may develop that divide it up sometime..

In the future..

Yes..

And the one final question. I guess as you rollout your broad module product portfolio this year. My understanding is these modules require a higher level of integration.

So I guess my question is will this higher level of integration require you to step up spending on capital equipment that’s unique to these modules?.

No, in fact we’ve already released many of these modules. We have few others that are being sampled to customer and the rest of them are in various stages of QA. So we don’t need any equipment from an R&D standpoint..

I am not showing any further questions at this time. I would like to turn the call back over to Meera Rao for closing remarks..

I want to thank you all for joining us for this call and wish you a very happy day. Thank you. Bye-bye..

Ladies and gentlemen thank you for participating in today’s conference. This does conclude the program and you may all disconnect. Everyone have a good day..