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

Steve Smigie - Raymond James Tore Svanberg - Stiefel Ross Seymore - Deutsche Bank Rick Schafer - Oppenheimer Anil Doradla - William Blair David Wong - Wells Fargo Ruben Roy - Piper Jaffray.

Good day, ladies and gentlemen, and welcome to the Monolithic Power Systems Inc. Q4 and full-year 2014 Earnings Conference Call. At this time all participants are in a listen only mode. [Operator instructions.] As a reminder the conference call is being recorded. I would now like to hand the conference over to Meera Rao, CFO of Monolithic Power Systems.

Ma’am, you may begin..

Thank you, operator. Good afternoon, and welcome to the fourth quarter and fiscal year 2014 Monolithic Power Systems conference call. Michael Hsing, CEO and founder of MPS, is with me on today’s call.

In the course of today’s conference call, 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. 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 Q4 earnings release and in our SEC filings, including our Form 10-K filed on March 10, 2014 and our Form 10-Q filed on October 31, 2014, which are accessible through our Web site, www.monolithicpower.com.

MPS assumes no obligation to update the information provided on today’s call. We will be discussing gross margin, operating expense, operating income, 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.

A table that outlines the reconciliation between the non-GAAP financial measures to GAAP financial measures is included in our earnings release, which we have filed with the SEC. I would refer investors to the Q1 through Q4 releases for both 2013 and 2014, as well as to the reconciling tables that are posted 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 one year, along with the earnings release filed with the SEC earlier today. MPS is pleased to announce record and allowing you of $282.5 million.

Full-year revenue growth of 18.7% clearly outperform the analog industry which SIA estimates accrued 10.2% over the prior year. Four 2014 MPS is non-GAAP gross margin also expanded 60 basis points to 54.6%.

Further our non-GAAP operating income excluding the $9.5 million O2 payment micropayment grew 3.6% to $16.6 million achieving record non-GAAP EPS of $1.03, a stellar growth rate of 34.9% over 2013. Over our first decade as a public company we have grown consistently and organically at a compound annual growth rate of 19.5%.

Over that same period our share holder returns measured in stock price appreciation grew at a CAGR of 17.5% per year. Diving into year-over-year revenue growth by market; industrial was up a record 43.3%, consumer revenue grew 22.8% and communications also increased 15.3% over 2013. Let me speak the results of each end market.

In industrial and automotive markets, sales rose to $49 million, fuelled by product sales for applications, smart meters, automotive, security and power adaptors. We’ve also seen significant design win activities in industrial and automotive. These design win activities have continued to translate into revenue growth in 2015 and 2016.

Revenue from consumer market increased to $122.8 million driven primarily by high value consumer markets like gaming, LED lighting, battery management and home appliances. Communications revenue grew to $64.6 million, fueled largely by growth in networking and telecom opportunities.

Computing revenue was down $1.8 million to $46.1 million mainly due to the ramp down in a huge HD client program that bottomed out in the first quarter of 2014 offsetting the growth in SSD. Switching to Q4; MPS had a record fourth quarter of its revenue of $75.7 million representing year-over-year growth of 19.1%.

Our fourth quarter revenue was above the mid-point of our guidance. Non-GAAP gross margin was 54.9%, the same as the third quarter and 70 basis points higher than the 54.2% reported in the fourth quarter from a year ago.

Our non-GAAP operating income was $18.3 million compared to the $19.6 million reported in the prior quarter and $13.7 million reported in fourth quarter of 2014. Q4 non-GAAP net income was $17.2 million, or $0.43 per fully diluted share compared with $0.46 per share in the previous quarter and $0.32 per share in the fourth quarter of 2013.

Let’s review our operating expenses. Our non-GAAP fourth quarter 2014 operating expenses were $23.3 million essentially flat with a $23.4 million we spent in the third quarter. Our GAAP operating expenses were $31.8 million in the fourth quarter compared with $32 million in the third quarter.

The difference between non-GAAP operating expenses and GAAP operating expenses for these quarters is stock compensation expense, income or loss on an unfunded deferred compensation plan and acquisition-related transaction costs basically in the third quarter.

Sub comp expense attributable to operating expense was close to $8.3 million in the fourth quarter compared with $8.6 million in the prior quarter. In addition we incurred approximately $107,000 of deal related expenses in relation to the Sensima acquisition in the third quarter of 2014.

Investment income related to an unfunded deferred compensation plan reduced GAAP operating expenses by $110,000 in the third quarter but added $175,000 of expense to the fourth quarter. On a non-GAAP basis our Q4 net income was $17.2 million or $0.43 per fully diluted share. This result is computed with an estimated tax rate of 7.5%.

Q4 2014 GAAP net income was $8.9 million or $0.22 per diluted share. Now let’s look at the balance sheet. Cash and cash equivalents and investment with $244.1 million at the end of the fourth quarter of 2014, above $238.5 million at the end of the prior quarter. In Q4 MPS generated operating cash flow of $20.6 million.

Cash proceeds from employee stock option exercises has contributed $1.5 million. These cash incentive for partially offset by $8.2 million of expenditures on purchase of 194,000 shares under our stock buyback program. In Q4 we also funded the $5.8 million quarterly dividend declared in Q3 and be purchased $2.4 million of capital equipment.

Accounts receivable ended the fourth quarter at $25.6 million, higher than the $24.3 million at the end of the prior quarter due to the higher sales in the third month of Q4 compared to the prior quarter.

Days of sales outstanding were up to 31 days in the fourth quarter from the 28 days in the prior quarter, down from the 24 days in the late year ago quarter Our internal inventories at the end of the fourth quarter were $40.9 million, essentially flat with the $41.6 million at the end of the prior quarter.

Days of inventory increased to 107 days at the end of Q4 from the 105 days at the end of Q3. Days of inventory in the distributed channel where once again lower than the prior quarter and the lowest level we have seen in the last two years. I would now like to turn to the outlook for the first quarter of 2015.

We have forecasted our Q1 revenue in the range of $70 million to $74 million. We also expect following. Non-GAAP gross margin in the range of 54.4% to 55.4%. GAAP gross margin in the range of 53.5% to 54.5%. Total stock-based compensation expense of $8.5 million to $9.5 million including approximately $300,000 [inaudible].

Liquidation expenses of $100,000 to $200,000. Non-GAAP, R&D, and SG&A expense to be in the range of $23.3 million to $24.3 million. This estimate includes stock compensation expense and litigation expenses. Fully diluted shares to be in the range of 40.4 million to 40.8 million shares before share buyback.

In conclusion MPS had outstanding results in its first decade as a public company. A product diversification strategy, backed by MPS proprietary leading edge technology has proven successful. Looking ahead into the next decade we’ll continue to execute strategy for sustainable and consistent growth and thereby enhance value to our shareholders.

I will now open the microphone for questions..

[Operator instructions] Our first question comes from the line of Tore Svanberg of Stiefel, your line is now opened..

Congratulations on the results and I guess on the decade; so my first question is on your communications business, it was up 10% sequentially with sort of bucks the trend seasonally and maybe even in relation with some of your peers, so can you talk a little bit about what’s going on with that business and would you expect them to continue?.

The quarter-over-quarter increase that you find in Q4 was in our traditional gateway business. If you remember back in Q3 had been a little choppy and lower than expected. So you are correct. It is a seasonally higher -- looking into Q1 I do expect this seasonal weakness in traditional gateway business.

Our networking and telecommunication business has been steady through the fourth quarter and we expect the same in the first quarter..

Very good and my next question and I don’t want to necessarily pick on anything negative but the one area that so decline last year was your storage and computing business, obviously there were some specific reasons why but as we look into 2015 should we expect that business to show growth more in line with what your SSD key business is doing?.

Yes because we have less exposure, the client SED business and our SSD business will continue to grow over the year..

Very good and then again looking at ’15 and looking at your four segments, could you may be rank what segment you expect to grow relatively faster and relatively lower?.

We expect all four segments to grow and I have never been a fan for ranking them. We expect particularly in a newer products in each of these markets we expect to see very good growth next year..

And also the computing business and lot of our designing win will comes in as a revenue in the second half of the year..

Okay very good and just one last question, can you talk a little bit about your relative visibility here in this quarter, I mean I know this quarter is seasonally a down quarter with Chinese New Year and so on but just relatively speaking, how is your visibility looking for the quarter in terms of the backlog or bookings or anything like that.

Thanks..

It’s a quarter where we came in with very good bookings, a backlog rather and we have continued to see good bookings. We feel comfortable about the guidance that given and very confident right now..

Very good. Thank you and congratulations again..

Thank you and our next question comes from the line Steve Smigie of Raymond James. Your line is now open..

Thanks a lot guys.

Another solid year, I think from that 19% it grow pretty close 20 there, can you comment Michael on what you see as the opportunity for this year, have got any products you are talking about the growth, because you do another 20% growth here or better?.

I can’t particular with what the percentage is although it really depend on the micro economic but I can tell you that whatever we – in the past three or four years, we did obviously with the [indiscernible] all the result which is coming from what we did in the three to four years ago, in our next year result, as we – what we have planned to see in the about one to three years ago and every things are the indications of we are on the right track and from a cloud computing mainly the servers communicating sites and also industrial and automotive and all of these segments, we are doing really well..

Okay great and specific to the server market, we saw obviously convenient and -- rectifier merge and then obviously maximum another competitor in the space, it seems like it’s opening up a lot for you guys because [indiscernible] can you talk about the opportunity in the server market in the 2015 may be even in 2016 as you may be there some designs opportunities to ramp in 2016..

Obviously, this is another MPS as a player and we have a much better chance now but server market is a very conservative and a [indiscernible] successful now and also the [indiscernible] and we start shipping now..

Just to add to that very quickly, for this year’s revenue all the design wins have already been done back in 2014 and so we seem that play through, I think as next year comes out the things get more interesting because that's where the consolidation in the marketplace plus it will be, our second round in this market all those things would play to our benefit..

Okay. Last question I [indiscernible] just as we look at gross margin going forward, it seems like you are getting decent traction in your products and this carries higher gross margin historically, what is the gross margin expansion opportunity there as the mix improves.

Could it be over 100 basis points or better for the year?.

As we have been saying in the past, we expect to grow to our gross margin steadily and consistently.

As you know as we get more of the higher margin revenue, we have opportunity to take some of the lower margin revenue so that we can accelerate top line and bottom line growth and we expect particularly the same so I can say all the time our revenue grows I would expect to see a slow and steady increase in gross margin..

Okay thanks a lot and congratulations on the numbers..

Thank you and our next question comes from the line of Ross Seymore of Deutsche Bank. Your line is now open..

Good afternoon guys. This is actually Matt Diamond on for Ross.

I want to ask a question that has been alluded to earlier but I am going to ask a little bit a in a different way, could you walk us through the drivers of your long term growth, there is a target out there of 20% to 25%, I am just curious what driver you see to get there over the next year or so, the next two to three years even, any of the biggest positives and negatives that you can see at this point..

As you know one of the key strategy is to grow through a diversification, so we expect the growth to come in from multiple market. For example if you take communication from the growth is coming from a newer networking and telecom market, we could also opportunistically say more in the traditional gateway business.

When you look at computing growth opportunity comes both from the SSV storage as well as cloud computing and as we look at consumer particularly on newer higher value market opportunities markets like battery management, LED lighting, home appliances, gaming all these will be growth areas.

Not to forget industrial where we have had multiple markets that are growing in industrial as well as automotive and in addition to all this we have module which is the contributing revenue this year.

So all these together will be contributing growth for us this year and more so next year and we feel very confident about that we are going to have strong growth but since we don’t focus more than a quarter, I don’t feel comfortable to saying our growth could be X or Y% but you are right a long term growth model is to grow top line at 20% to 25%..

All of the Meera mentioned, they are all, they are going really well in 2014 and Meera missed another big component of it, the sector DC and that contributes a tremendous revenue and we will continue to focus and it may contribute to grow..

Got it and then in same [indiscernible], could you talk about your OpEx trajectory for 2015, I know it has been mentioned that you have enough capacity for these new products but I am wondering if anything has changed from 3Q to 4Q, OpEx as far as the trajectory for 2015..

Our Q4 OpEx was at same level as Q3, although little higher than guidance and probably reason is that we had the higher—new product development cost up that we saw in Q4.

So going forward into 2015 other than the pay raises which we talk about in the last calls, we do expect as revenue grows we will continue to increase our investment because that helps us grow even faster in outer years.

So we will do some investment in both R&D side as well as in sales and marketing but it will be in line with revenue growth meaning that the revenue growth is going to be higher..

Okay great thanks very much..

You are welcome..

Thank you and our next question comes from the line of Anil Doradla of William Blair. Your line is now open..

Hey guys congrats from my side, can you comment about the inventory level in the channel, what you are seeing out there , and I have a follow-up.

Sure, inventory in the channel, when they came into the fourth quarter, it was already lower than the level we had been operating in for the last two years, and given the concerns that we had heard across the industry or perhaps some softness in Q4 we continued to manage the inventory in the channel fairly lean into the fourth, and as a result we came in even lower than the prior quarter.

And our expectations as we -- as the business improves over the next few quarters we will take inventory in the channel back up to the levels that we typically operate at..

Okay great, and Michael, recently you are quite the Swiss company Sensima, the specialist motor company; what’s the latest on that front and are there any revenues yet [inaudible] from that acquisition?.

Yes, being with the group and visiting our customers a couple of times, the results are great and some of the opportunity we got with some revenue, and other ones will take a little longer time. In a couple of years our shareholders will think that MPS [inaudible].

And I think the current revenue, the revenue that we have -- we have a very little revenue currently, but the design wins are shaping up nicely and that way we expect a lot more revenue in future years..

Since technology and it will revolutionize the motion control. Many other competitors, didn’t realize..

And I don’t know that, but you know you talk about the pipeline design wins and 2 to 3 years or so, shaping on to revenues this year, last year, but there’s a delay.

If you want to look at the pipeline and if there was a discount factor to the actual revenues, can you share with us some color about that? Typically the pipeline, is that like the standard -- less than 70%, or whatever happened in the pipeline, it has more or less translated into revenue.

Then how that evolved over the time, I mean if it is some qualitative [inaudible] very much in progress?.

We haven’t looked at it with a discount to our design win. Typically once we have the design wins we do see revenue come in, a lot of, how much revenue comes in depends upon how our end customers succeed in the marketplace and also depends upon the macro.

But we have been, I would say overall very happy with the conversion of the design wins to revenue. .

And our next question comes from the line of Ruben Roy of Piper Jaffray, your line is now opened..

Meera, I’m wondering if you could give us a little bit of commentary on the service side of the sourcing computing business near-term, kind of what that as expected in Q4, and maybe an update on the Grantley cycle would be great..

On the Grantley cycle, this is one where most of the design win had been completed in 2013 and 2014. We started seeing our first revenue in Q3 and we ramped in Q4 and we expect to see this ramping up -- continue to ramp this year. Most of the design wins on the Grantley service side are in the point of load.

We do have a few recor design wins at some of the emerging silver makers in Asia and –.

In the U.S..

And then the second tier in the U.S. and so this is the first cycle for us, maybe prove our as product, we do happened to have a product, but we have to prove ourselves as a supplier and that our products are reliable.

And we are very excited about all the design activity that is taking place for the next cycle that we sealed a better position as a result of having played in the Grantley cycle..

That’s really awful.

Thanks Meera, and to that end on the last bit of commentary, for the next cycle, I guess which includes inventory for the next cycle, I guess which includes[inaudible] from Intel, would you say that you have some of the content driver coming as well as market share or is that just market share, there is no additional content coming?.

I agree on those..

Okay and then just finally I have a follow-up question on the storage side; you had Q1 of last year, the heat from the one OEM, solid-state drive where a big growth driver, I think you are running solid-state drive that maybe a third to a little bit better as a portion of the overall storage business.

Do you have any idea as you look at into 2015 based on design wins where solid-state drives end up and then what that might do for growth in the storage area?.

SSD drive revenue in storage is more than half of that, I think it’s close to 50%, and so most of our design wins are either on the enterprise side are on the high-end client-side and so our design wins are playing out. We also have a second SSD teammate that we have introduced.

This one is targeting PCIE and SaaS and we expect to see revenue on that in the second half of this year as well. And so all these things together will be driving our growth..

And our next question comes from the line of Rick Schafer of Oppenheimer, your line is now opened..

This is Shawn Simmons calling for Rick. Congrats for the good results and guide. My first question is centered around your automotive and industrial business, you guys so a nice uptick here last year, I guess.

How do you view that business for 2015? Do you expect to see sort of the same incremental growth and can you potentially quantify automotive as a percentage of sales?.

Let me answer that. The industry automotive as you know had a long designing cycle. These are revenues that happened three or four years ago, and we will start to focus on it. And for next year our sphere continues to grow, and in terms of quantifying the numbers, we don’t disclose that. I will let Meera to mention about that.

The train is we will focused on this three or four years ago and we continue to focus on and the numbers will grow..

We have already said in the past, for the last two or three years, is that industrial is always the slowest to grow and we expect steady growth and we recognize that they are actually done a lot better than that and I expect 2015 results are going to be better than the slow and steady nature of growth that we typically associate with industrial.

But in terms of an actual growth of percentage we don’t get that kind of guidance. I would say at this point automotive is one of the four big drivers in this and I expect as this year goes through it will be one of the fastest growing drivers within the industrial and automotive segment..

Okay great and the second follow-up on that.

As you have two distribution agreements from last year, and is therefore any chance to accelerate it, that growth in there, how are those relationships progressing?.

Those relationships are largely for industrial and automotive revenue, and so the design wins that they are generating would be revenue out later in time just because of the time it takes to convert the design wins in industrial and automotive. So they have been very helpful but that’s going to be future years’ growth..

And in my last question is just on the power modules; I know you guys are expecting to see some revenues this year, how significant you think that can be? And where do you expect some of those initial design wins to start ramping?.

We have our design wins currently for the first four or five modules that we introduced. We already have design wins that is in practically every market that we play in.

But as we have said before, just looking at the time to convert from design wins to revenue, consumers always adopt it, but the revenue we expect to see this year would mostly be consumer. We will be very happy if some of the others converted also this year. So we expected revenue from modules, or am willing to say is --.

[inaudible] because the number is small. In 2003 we introduced our five or six modules. In 2014 we introduced three times amount, like a 15, 16 and for those products generate revenue in by 18-36 months. .

Our next question comes from the line of Lina Tsang [ph] of [inaudible]. Your line is now opened. .

My question has been answered. Congratulations as well..

Our next question comes from the line of Steve Smigie from Raymond James. Your line is now open. .

Meera, I just wanted a follow-up on the modules, as you said you talked about it is doing fairly well in consumer. I’m just curious what are the margins like on these consumers; in the one hand I feel like the modules are very differentiated products, so we expect something better but at the end of the day, it’s still the consumer market.

So I was hoping to get some color on that. .

Yes, we expect the margins on all the modules to be good, even in the consumer market it will be above consumer margins. .

Above corporate average..

Okay.

And you guys have done a good job, again trying to diversify away from just being a consumer company, with that said it’s in some extent good to hear the consumers, how actually you’re going to grow your ways as the modules take off, is that fair to think because of the success in the modules that you can still have healthy growth in consumer?.

We expect to have a healthy growth in consumer and not just because of the modules, but also because some of these newer high value opportunities that we’ve found like battery management, LED lighting –.

These are wearable goods and that’s sports cameras, these are all very high -- customers will appreciate our technology and they will pay for those type of products. I think that internet of things, is emerging and it has a lot more demand for those type of products. .

Internet is a thing that presents a lot of opportunities for our modules. .

Under the comment about gross margins as you said you’ll have the newer products growing and getting a higher gross margin that you’re also going to take some lower margin stuff -- you know given that opportunity.

Is that lower margin stuff that you would take, is that consumer or is it kind of spread out across the end markets there?.

I would say it’s in our traditional consumer may be even in our traditional Gateway business those are the kinds of markets that we play in opportunistically. But the net idea is that at the end of the day when our revenue grows we still expect to show an expansion net-net in our gross margin. .

Right. On that Gateway stuff, obviously you have some exciting new stuff ramping in coms but I think a decent chunk of coms is still the Gateway business? How are you trying to manage that Gateway revenue to use – do you keep trying to grow that as well or is it more this kind of a cash-cow business. .

For us, you know as we see opportunities we keep playing -- how much we pick up is all driven by how our revenues and margins are playing out. It is an opportunistic play for us. .

And you talked about in industrial [inaudible] it’s just you have the new autos, one of the major drivers -- can you just give it up to any other three major drivers in there..

Sure, we have smart meters. We have security and surveillance and then we also have power adapters. .

Any three here, one of those you expect to do better in 2015 versus the others?.

Automotive. .

And I am showing no further questions at this time. I would like to turn the conference back over to Meera Rao for any closing remarks..

Thank you for joining us for this conference call, and we look forward to talking to you again in April for our next conference call. Thank you. Have a nice day. .

Ladies and gentlemen thank you for participating in today’s conference. This does conclude today’s program and you may all disconnect. Have a great day everyone..