Theodore Bernie Blegen - Interim Chief Financial Officer Michael R. Hsing - Chairman, President and Chief Executive Officer.

Tore Svanberg - Stifel, Nicolaus & Co., Inc. Rick Schafer - Oppenheimer & Co., Inc. (Broker) Matt Diamond - Deutsche Bank Securities, Inc. J. Steven Smigie - Raymond James & Associates, Inc. Quinn Bolton - Needham & Co. LLC Anil Kumar Doradla - William Blair & Co. LLC.

Good day, ladies and gentlemen, and welcome to the First Quarter 2016 Monolithic Power Systems Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. As a reminder, this call will be recorded.

I'd now like to introduce your host for today's conference, Mr. Bernie Blegen, Interim Chief Financial Officer. Please go ahead..

Good afternoon, and welcome to the first quarter 2016 Monolithic Power Systems conference call. Michael Hsing, CEO and Founder of MPS, is on the call with me today. For those of you, who I haven't been introduced to yet, my name is Bernie Blegen.

I've been with Monolithic Power Systems now for four-and-a-half years, working largely in the background with Meera, as the Corporate Controller. For those of you, again that I haven't met, I look forward to getting introduced to you in the next quarter or two.

In the course of today's conference call, we'll 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 Q1 earnings release, and in our SEC filings, including our Form 10-K filed on February 29, 2016, which is accessible through our website, www.monolithicpower.com.

MPS assumes no obligation to update the information provided on today's call. We will be discussing gross margin, operating expenses, operating income, other 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 Q1 2015, Q4 2015 and Q1 2016 releases 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 over the Internet, and will be available for replay on website for one year, along with the earnings release filed with the SEC earlier today. MPS is pleased to announce record first quarter revenue of $84.5 million.

Our first quarter revenue was on the high-end of our guidance, and represented a 14.9% increase from the prior year quarter. This was our 11th consecutive quarter of double-digit year-over-year revenue growth. This consistent revenue growth is a result of our diversification strategy and investments in targeted market segments.

As we have become established among the first tier suppliers to the major OEM customers in these new markets, we have encountered even more exciting opportunities that if we invest now, will enable our growth to accelerate in the next few years.

We want to capitalize on these new businesses by investing strategically, while being mindful of the need to operate in our long-term model. These efforts will enhance our market position, and accelerate MPS' revenue growth.

Turning back to the financials, this revenue increase over the prior year was fueled by growth from our Industrial, Computing and Consumer segment. MPS' non-GAAP gross margin also expanded 20 basis points year-over-year to 55.0%. Looking at revenue growth by market segment; Industrial was up 38.3% from 2015.

Computing revenue grew 35.2%, and Consumer revenue was higher by 7.5%. First quarter Communication revenue fell 2.8% from the prior year. Let me speak to the results of each end market. In the Industrial market, sales rose to $18.4 million fueled by product sales for applications in Automotive, Security and Point-of-Sale Equipment.

Computing revenue increased to $15.4 million reflecting strength in notebooks, servers and storage. Revenue from Consumer markets increased from a year-ago quarter to $33.8 million, driven primarily by gains in high-value consumer markets like home appliances and battery management as well as in GPS devices.

Communication revenue fell $0.5 million to $16.9 million largely due to lower wireless revenue. Compared with the prior quarter, Q1 2016 revenue decreased $2.4 million or 2.8% on seasonally lower revenue in the Consumer segment, with each of the other three segments improving. Non-GAAP gross margin of 55.0% matched the prior quarter.

Non-GAAP operating income was $20.0 million compared with the $22.5 million reported in the prior quarter. Q1 non-GAAP net income was $18.7 million or $0.45 per fully diluted share compared with $0.51 per share in the previous quarter. Let's review our operating expenses.

Our non-GAAP first quarter 2016 operating expenses were $26.4 million, $1.1 million higher than the $25.3 million we spent in the fourth quarter of 2015, mainly due to increased compensation costs reflecting pay raises, staff additions and higher payroll taxes.

Our first quarter 2016 GAAP operating expenses of $35.1 million matched GAAP operating expenses recorded in the fourth quarter.

The difference between non-GAAP operating expenses and GAAP operating expenses for these two quarters is stock compensation expense, expense on an unfunded deferred compensation plan and the write-off of an acquisition earn-out liability in Q4 of 2015.

Stock comp expense included in operating expenses was $8.5 million in the first quarter compared with $12.0 million in the prior quarter. This between quarter decline in stock comp primarily reflected a one-time $2.9 million expense reversal associated with our prior CFO's retirement.

We expect stock comp to normalize once a permanent CFO replacement is in place. Investment expense related to the deferred comp plan increased GAAP operating expenses by $157,000 in the first quarter of 2016 compared to $290,000 of expense in the fourth quarter. Turning to other income.

First quarter non-GAAP other income of $241,000 was $117,000 lower than the prior quarter, primarily due to foreign exchange transaction losses resulting from a weakening of the dollar. Switching to the bottom line. On a non-GAAP basis, our Q1 net income was $18.7 million or $0.45 per fully diluted share.

This result is computed with an estimated tax rate of 7.5%. Q1 2016 GAAP net income was $10.6 million or $0.25 per fully diluted share. Now, let's look at the balance sheet. Cash, cash equivalents and investments were $256.9 million at the end of the first quarter of 2016, up $16.6 million from the $240.3 million at the end of the prior quarter.

This increase in cash reflected cash flow from operations of $27.1 million offset by the $8.0 million quarterly dividend payment, and the $4.3 million spent on capital equipment and office space. No shares were purchased during the quarter under our stock buyback program.

Q1 cash proceeds from employee stock option exercises and employee stock plan purchases contributed another $1.7 million. Accounts receivable ended the quarter at $28.8 million, down from the $30.8 million at the end of the prior quarter.

Days of sales outstanding were 31 days in both the first quarter 2016 and in the year-ago quarter, compared with 32 days in the fourth quarter of 2015. Our internal inventories at the end of the first quarter were $62.3 million, lower than the $63.2 million at the end of the prior quarter.

Days of inventory, however, increased slightly to 145 days at the end of Q1 from the 144 days at the end of Q4. Inventory on our distribution channel increased from the Q4 2015 level reflecting the seasonal build. Prior to this, inventory in the channel had declined in each of the three prior quarters.

I would like now to turn to our outlook for the second quarter of 2016. We are forecasting Q2 revenue in the range of $91 million to $95 million. We also expect the following. Non-GAAP gross margin will be in the range of 54.6% to 55.6%.

GAAP gross margin will be the range of 53.6% to 54.6%, total stock-based compensation expense of $10.4 million to $12.4 million including approximately $400,000 that would be charged to cost of goods sold, litigation expenses of $100,000 to $200,000, non-GAAP R&D and SG&A expense to be in the range of $26.1 million to $28.1 million, this estimate excludes stock compensation and litigation expenses, other income of $200,000 to $300,000 before foreign exchange gains or losses, fully diluted shares to be in the range of 41.2 million to 42.2 million share before share buyback.

In conclusion, we continue to grow and we continue to invest for further growth. I'll now open the phone lines for questions..

Thank you. And our first question comes from Tore Svanberg from Stifel. Your line is open..

Yes, thank you, and congratulations on the results. And Bernie, welcome to these public calls.

My first question is on your relative visibility, I know you typically don't give the booking and backlog numbers, but just given all the macro backdrops out there, how would you classify your current visibility either sequentially or year-over-year?.

Sure. When we look at the backlog going into the quarter, as well as the momentum that we carried in from the prior quarter, we feel that we're in comparable shape to when we were going into either Q1 of last – or Q2 of last year or Q1 of this year. So, all-in-all I feel, we're in pretty good shape..

And....

I....

I'd just add on, like I mean, given in the last few years, and then when we go into the quarters, and has a more and a more less term business, and a more and more booked (12:41) and although we don't release the numbers, but the trend is very good for our long-term business..

Very good. And my second question is in relation to your Communications business, I recognize, you're doing exceptionally well in all other three. Now, this one, it's down year-over-year, but it was up 7% sequentially.

So you think, we're starting to see the reversal of the Communications business, and if so, what would be driving that?.

Let me answer that. And the short answer is, no. That came in, because a lot of those Communication business during – in the wireless LAN, that's from the legacy product. And although we're doing pretty well, and those are business we're very opportunistic to gain revenues and margin dollars.

However, we're going to reverse that, and it will be a lot more sustainable market, I see it in a couple of years down the road. We are now releasing the product for telecom market segment, and I really believe these are winners, and we will take shares in the large – this market segment..

Very good.

Just one last question from me, either Michael or Bernie, could you just give us an update on your module business, and maybe your programmable module business? I know you probably can't give us any specific numbers, but maybe where some of the design wins are coming, and are you starting to see revenue already in the programmable modules or is that a bit too early? Thank you..

Yeah. So I can take some of the numbers there, and then I can defer to Michael as far as the programmable. In general, the modules business is on track with what we were expecting, and what we presented at the Analyst Day earlier.

We've introduced a number of products, and we've obtained a number of very positive reviews and several design wins which are generating good revenue right now, obviously with the longer-term growth opportunities coming later this year and into 2017..

The programmable modules, and as we talked about in the last Analyst Call, those are products that – at the time we talked about it, is about a year, a year and half away. So we haven't really, really generated any revenue yet, but we're starting sample rate in those modules.

And from the last time in, I know in the history of MPS, we didn't talk about all the products until we generate revenue. However, our business model changes, and also particular changes in anything what we do now will affect two years or three years later.

So in the last year, Analyst Day, we talk about all the products that would generate revenue two years or three years down the road..

Sounds good, and congratulations on another stellar quarter. Thank you..

Thank you, Tore..

Thank you. Our next question comes from Rick Schafer with Oppenheimer. Your line is open..

Hey, thanks. And I'll add my congratulations to you guys on a nice quarter.

A couple of questions, I guess, maybe the first one is, could you give us an update on the progress ramping your new foundry, and maybe the timing and linearity of the associated expenses, I think you talked about a couple, $2 million or $3 million, I think, Bernie, in the incremental expenses? And another question I had on that is, this foundry just going to be for BCD5 or is it going to run all Monolithic processes..

Thanks for the good words on the quarter. So, the progress on the foundry is coming along quite well. In fact, we've already started to take some deliveries of wafer from it, and we have several products that are actually in production.

We're if I could characterize it probably at about the mid-point of bringing up all the products that we want to, and it is not restricted to only the BCD5, but also a couple of the earlier versions as well..

Got it.

And as the follow-up, what will that bring total wafer capacity up to for you guys now that you've got the fourth foundry running, I mean, is it – and is it going to create any sort of bottlenecks with Chengdu or do you just simply outsource that overflow?.

I'll answer your second question first, is that, we outsource the overflow, we've been very successful in migrating to that, adding that into or complementing that as our business model.

And then, rather that talk specifically in wafer volume, I think we've said in the past that, in terms of revenue, with three fabs we had about a little over $100 million of capacity per quarter, and now we're going up to about $125 million to $130 million per quarter?.

Yeah, and also the overall manufactured capacity, we transfer out in low-end product, but those are traditional products; high volume, we go to a testing house, and for packaging in testing, we are in-house or we're more developed or more high in a very high quality products, and those are – we have a much better control, much worthwhile in the long term..

Got it. And then just one final one from me, it's on E.MOTION.

Obviously, a new product that's kind of changing the way motor makers and system designers are designing products, so maybe just, kind of provide some color on or talk about, what's your go-to-market strategy is with the sort of brand new product category, if you will, or brand new product? I mean, it's a $2 billion opportunity or more, I think you've talked about in the past.

I mean, how do you scale that business, I guess, with limited resources?.

It is true, there's limited resources, like I mean, but as Bernie said in the script, we mindfully invested, and not affecting our long-term growth model – I'm not giving you any – but are really excited about this technology. And as you see it, we generate, already generate pretty meaningful revenue from Sensima's existing product.

And once we put their products in our – are qualified and now we transfer into our own foundry, and the volumes are going to increase quite a bit. However, those products are still in Consumers' area, and as expected, and you have a fast ramp it's always in those Consumer area.

And now, the more exciting thing is for the future, we changed the way our, the behavior of – design engineer behaviors, all these machine design, these are equipment designer, it takes time.

And but we introduced all these ideas in the products and concepts and we're designing and some of them we're co-designing with all these first tier customers, and those, I'm very confident those revenue will come..

Got it. Thanks, guys..

Thanks, Rick..

Thank you. Our next question comes from Ross Seymore from Deutsche Bank. Your line is open..

Hey, guys. This is actually Matt Diamond on the line for Ross. Congrats again on the great quarter, and thanks for letting me ask a question.

I'm curious on the end market breakdown this quarter, was there any one that didn't align with your own expectations and if it or they didn't what ramifications those surprises might have for 2Q?.

No, no. I think that there were a lot of positives that we take away from this quarter relative to both how we performed in Q4 as well as against our expectations.

The growth that we're seeing in Industrial, and particularly a lot of that is driven through automotive, but also our high value opportunities in the power sourcing and in security are ramping very nicely.

And I think, going back to the point that we made in the script is that, I think that we've done a good job of being able to get introduced to a lot of high-value opportunities, and now what we want to do is be able to capitalize further to both continue and accelerate that growth.

Likewise, when we look at the Computing, we saw very good opportunities in the high-end notebook and a continuation of progress in Storage as well. So in the Computing and Storage, in fact it was a pretty balanced approach. We didn't have any categories that fell short of our expectation.

So when I sum it up, I think we've touched on Communications, that went down in Q3 of last year, but as we pointed out, it's trending nicely, and we have good opportunities there..

Yeah, we don't – to answer your questions, do we have – expected a gain or loss, and again, MPS' revenues are very much expected, and are very stable. And we know in a few quarters out, what gain, what losses, okay.

Of course we do have a – play a lot of opportunistic games in those traditional legacy product, but we do see, and expect the things as Bernie said in the script. We encounter a lot of demand for the new product from the first tier OEMs..

Excellent. And just in the second half of the year – you may have already answered the question, how do you feel about new products heading into the second half of the year, should there be any expected acceleration there, or any way to ballpark that would be helpful..

It's pretty much set. In our revenues, we focus on two years or three years out, and those customers design us in (24:33) and work with us on those products, and if they don't cancel the product or delay the product the revenue is there. And now we don't see a significant difference, and it's pretty much as we expected..

Excellent. Thanks so much, guys..

Okay, thank you..

Thank you..

Thank you. Our next question comes from Steve Smigie from Raymond James. Your line is open..

Great. Thanks a lot, guys. I'll add my congratulations to the good numbers there. Michael, I just wanted to follow-up with your answer earlier in the call on Communications, you talked about new products coming out.

I just couldn't understand, was that for higher-end Communications equipment or was that a new set of products for more the home router type equipment, and is that quite a load or what type of product would that be that you think's going to be a pretty good one?.

Yeah, if we're defending our own point of law (25:36) in home router systems, then it has to be at a lower cost. And of course we develop those product, we release those products to defend our segment, still very good money to be made there.

And what I'm more excited about is that, the new line of our product, and you know we released very high power density product into servers in the Computing segment. Those similar type of products go for Communications, these are for infrastructures.

And servers and infrastructures are somewhat related, and those products we redesigned for the infrastructure, these products are coming out. That's kind of product I really talk about..

Okay, right, that sounds great.

On the auto side, any thoughts to what growth might look like for auto for the year, now that we're sort of decently in, and you probably have good visibility on designs, and what you think auto could potentially grow into 2017?.

In autos, and as expected, we said it, in the last couple of years, we see the very consistent of a growth, and a ramp and we don't see any different. Now the opportunity is that, we've seen a lot more now, and we need a lot of more new product for that..

Okay. And do you think that you'll keep focused on the areas where you already have success or investment or would you move over and circle to powertrain, as well, I don't think you have any real presence right now.

If I could just throw one last question in, you guys have been investing, you mentioned again, here on the press release, can you talk a little bit about how you see OpEx spending in the back half of the year, is it anything different what you guys already communicated or is it pick up, slow down, a little bit from what you were originally thinking? Thanks..

So, as far as – I'll take your first question on automotive, is that, certainly being – we're such a small component in selling into that huge market opportunity that we have tremendous upside both in terms as far as introducing new content to the cars as well as expanding on the designs that we've already had built in.

So we're very excited about automotive, obviously. And then as far as like what we are trying to signal as far as the sales and marketing expenses is that, there's just a real opportunity to continue this growth.

We've done, we've already made the investment in R&D as far as the design, the process technology, and now the fabs, and so in order to complete the rollout to be successful is to invest appropriately in sales and marketing..

So that's on the expenses side, we do have to sensibly invest, and we, again in the last conference call, we talk about, we balanced our short-term shareholders.

Nobody admit it, we have short-term investors, and some are short-term, what I mean is okay, for one-year or two-year guys versus a four-years or five years guy, we balance those interests, because whatever we do in this year has nothing to do with the revenue generation for next year, so it's two years or three years out.

So we balance those shareholder interests. And when talking about powertrains, I'll answer you very specifically. Yes, we're going to get in there, and now before we get in there, we need to put our house in shape for these are quality controlled, these are very critical components, and we need to upgrade our production control..

Okay great, congrats again. Thanks, guys..

Thank you. Our next question comes from Quinn Bolton with Needham. Your line is open..

Hey, Michael, just wanted to follow-up on that last question about the long-term opportunities by investing in new products and sales and marketing to-date. It sounds like you're not changing your sort of target to grow OpEx at a rate of 50% to 60% of sales.

One, I just wanted to confirm that, and second to the extent that, that is still accurate, at what point would you consider making larger investments now, how big would some of those future opportunities be for you to say start to spend at a growth rate more than 50% or 60% of sales...?.

Yes, that's a very good question. Okay, and once I talk about investment, everybody get nervous, okay. Here is – we're not going to – okay here's our long-term target, okay, 50%, 60% of our growth – of the OpEx growth from the revenue growth.

And we're going to stick with our models, and we've been (31:13) one year's below a little bit, below one year, a little bit higher, but I would say the long-term, our long-term is about two years or three years, and we'll be average out in a similar range.

We're not going to have big gigantic jump, and we'll surprise everybody, we won't do that kind of thing..

Got it.

Okay, let me try and just ask, on the E.MOTION product, I believe that you were scheduled to be taping out the fully integrated E.MOTION part sometime here in the first half, just wondering if you can give us an update if that's still on track?.

Yes, we have – actually, well, the product was delayed a little bit. And we said, in the release in May, it doesn't look like we're going to release in May, and we have – all the engineers are bogged down with some of the details, and okay, what I think to me these are very minor things, but however we're delayed.

But the products that we're working with these are large customers for very fast revenue – I mean talking about fast revenue is still a year, and a year-and-a-half away. And those products, and engineers want to make final changes before – to satisfy those large customers, and I don't have a big argument about it.

And those – however we're releasing the product in the next couple of months and all the existing Sensima's products, and as I said earlier, we generate pretty good revenue now..

Great. And then just one for Bernie, you mentioned the sales or disti inventory did increase here for the first quarter, for the first time in the last three quarters or the previous three quarters, I should say were down.

Can you give us some sense how much inventory did you build in the first quarter, and any expectations for what disti inventories will do in the second quarter, is that another quarter typically when you see the channel build seasonally?.

There's two components to that. So, yes, we did experience a dollar increase as far as inventory in the channel, but as significantly is, we're calculating the days off of a lower denominator with the lower revenue. So in fact the pattern conformed pretty much to the normal seasonal that we've seen.

For Q2 we're actually going in with the expectation of not increasing the channel inventory in terms of days keep maintaining those generally about flat maybe a day increase or so, but we don't expect that to be material..

But on a dollar basis it probably goes up a touch, just reflecting the higher revenue base?.

Yeah..

Great. Okay, thank you..

Thank you. Our next question comes from Anil Doradla with William Blair & Company. Your line is open..

Hi Michael, Bernie, congrats from my end too. I had a couple of questions.

What was the contribution of automotives during this quarter, can you give us some sense, I know you don't break it down, but can you give us some sense what the revenue contribution was?.

Yeah, I think that, what we've said in the past is that, of the Industrial, it comprises about a third of that segment, and now auto is starting to increase as a percentage of that segment as their sales are growing faster than the remainder of that market..

Okay, great. And one for you Michael, you talked about programmability, it sounds like the revenues would be some time in next year, couple of questions around that. Is it second half of next year, and more importantly obviously this is a big important trend within our management sector.

Can you talk about the competitive landscape, are people catching on the programmable solutions, when do you think competition is going to come in?.

I don't see, and all of the – lot of people are talking about. And some people talk about, and they have products for those Industrial market segments. But these are still very much semiconductor-related, and not – it's a very similar to what they have before. And MPS' product is significantly different, and designed for ease of a use.

In those revenues, and I expected, yeah we do see fast revenues in – from when we release it, and also we have to release it with the softwares and also on the Internet..

So, the revenue contribution is this going to be more like Q3 or do you think it's going to be more of a Q2 contribution?.

I will say that, at this time, I'll say that, it's like second half of the year..

Okay, very good. Once again, congrats from my side..

Thank you..

Thanks, again..

Thank you. And we have a follow-up from Tore Svanberg with Stifel. Your line is open..

Yes, thank you.

Looking at the cash flows, I think they were almost at record levels, I was just wondering if there was any sort of one-time items that helped those cash flows or should we assume for operating cash flow to hover around 30% of revenue going forward as well?.

Yeah, there was no one-item per se. What we had seen is that working capital in each of the three prior quarters had consumed cash and in this quarter it actually turned to be beneficial as receivables in particular went down..

Very good. And last question, on your Consumer revenues, so obviously high value Consumer continues to drive the growth there. I was just wondering within battery management, how sizable that business is becoming.

I believe you said at the last Analyst Day that, that would be one of the biggest growth driver of the Consumer business, and just trying to understand relatively how big that has gotten now? Thank you..

Yeah. So when we look at the battery management, currently it's still relatively small, relative to the overall opportunity, but it is growing significantly more than any of our other market segments in Consumer..

Great. Thank you, again..

All right, thank you..

Thank you. And I'm showing no further questions at this time. I'd like to turn the call back to Mr. Bernie Blegen, for closing remarks..

Great, thank you very much. I'd like to thank you all for joining us on this conference call, and look forward to talking to you again in July at our second quarter 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. You may all disconnect. Everyone, have a great day..