Theodore Bernie Blegen - Monolithic Power Systems, Inc. Michael R. Hsing - Monolithic Power Systems, Inc..

Quinn Bolton - Needham & Co. LLC Vincent Celentano - Raymond James & Associates, Inc. Rick Schafer - Oppenheimer & Co., Inc. Matt Diamond - Deutsche Bank Securities, Inc. Anil Kumar Doradla - William Blair & Co. LLC Tore Svanberg - Stifel, Nicolaus & Co., Inc..

Good day, ladies and gentlemen, and welcome to the Monolithic Power Systems' Q4 2016 Earnings 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 would now like to introduce your host for today's conference, Mr. Bernie Blegen, Chief Financial Officer. You may begin..

GAAP gross margin in the range of 53.8% to 54.8%; non-GAAP gross margin in the range of 54.8% to 55.8%; total stock-based compensation expense of $12.1 million to $14.1 million, including approximately $400,000 that would be charged to cost of goods sold; litigation expenses of $150,000 to $250,000; non-GAAP R&D and SG&A expenses to be in the range of $28.3 million to $30.3 million, this estimate excludes stock compensation and litigation expenses; other income of $300,000 to $400,000 before foreign currency exchange, gains or losses; fully diluted shares to be in the range of 42.8 million to 43.8 million shares before any share buyback.

In conclusion, in the last several years, MPS has focused on investing in new products and targeted markets. Starting this year, we believe MPS will begin to benefit from those investments, which will translate to strong revenue growth in 2018 and beyond. I'll now open the microphone for questions..

And our first question comes from Quinn Bolton with Needham & Company. Your line is open..

Hey, guys. Congratulations on the nice results and outlook. Wanted to start, Michael and Bernie, on the notebook business. We just had the formal launch of Kaby Lake at CES, and so wondering if you could sort of give us your outlook now that that processor formally launched.

And a sort of related question, Intel I think is planning yet another fourth generation – I'm sorry, 14-nanometer processor to be introduced in the second half of the year. I think with Kaby Lake, you guys picked up market share.

As we look forward to that eighth-generation core processor Intel was talking about introducing towards the end of the year, do you think you might be poised for additional share gains on those client platforms?.

Sure. Quinn, thank you very much for the question.

So, as we look at 2017 and 2018, certainly going into the Kaby Lake, we've benefited significantly by having the reference design, and we've been able to see a lot of very good traction for our power solutions, because, as we mentioned in the script, of the overall efficiency and the small form factor.

So, as we look at the current year, we continue to see sort of a similar growth rate as we've experienced in the previous generation of Intel products.

Now, as we look out to the product, which I believe you're referring to of Intel's next generation Cannonlake, which I believe may come out at the end of this year or in the early part of 2018, we go from not only being a reference design, but also we have been designed into their core product, which is a significant enhancement over our previous position.

So we remain very optimistic in that relationship for the high-end notebooks..

Quinn, this is Michael Hsing. Let me add on. I'm very aware, like any other investors, that notebook is associated with lower margins. And however, we develop those based on the QS Mod, that technology. We develop those product and these are very unique ones.

And we're only focused on size constraint, and that requires a very – notebook has a longer run time, which is very highly efficient. And also, it's a time to market because our product is very easy to use. So we only focus on those high-end market.

As I see the notebook market segment, it's only one of the product line and we're not really concentrated on it. We really focus on a balanced growth in the overall MPS..

Thanks for the additional color. I sort of wanted to move on to the new process technology that you just announced on the call, the high-voltage SOI process. And, Bernie, I think in the script you mentioned some medical products.

I guess I would have thought that there could be applications for low-power SOI in other perhaps industrial or perhaps even comm, other related markets.

So wondering is there a particular application or use case within medical? Or do you see that really is just the first market and you've got opportunities well beyond the medical market for that SOI process?.

You mentioned exactly right. There are other market segments that MPS couldn't – within the industrials, even autos and medicals, and for some of the product segments, we couldn't adjust it. And we think long and hard that's the high-voltage SOI is the best, it's the best way.

So we took us a couple of years to develop that technology, and the first few products will be in the medical market segment..

And, Michael, is that with one of the existing four foundries? Or will that be a process that require the new foundry engagement?.

We – both actually. This product is in the new foundry, yeah..

New foundry..

Okay. Okay. Great. Thank you..

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

Thanks. This is Vince Celentano on for Steve. So, right now infotainment is your biggest part of revenue within auto.

Is that more so due to Monolithic deciding that this is the area that you're best positioned to take share in? Or is it more of a matter of infotainment having the highest content opportunity? If it's the latter, what would you say are your next largest content opportunities within auto?.

There are a number of opportunities that were designed into in automotive. I think that our initial footprint, when we started out in the area four years ago, was definitely in the infotainment. And now we've moved into many of the lighting systems, a lot of the systems that are either in the body or designed into sensors.

We're into some of the light ADOS areas. So I don't think that we're necessarily restricted in any way, and that I think we have a broad set of offerings for automotive. And, as we referenced, we've had design wins and a lot of momentum that we expect to continue out into 2018 and 2019..

Okay. Thanks. And last quarter you mentioned that server was 10% to 15% of computing in 2015.

Is there a way you can give us an update on what 2016 was, and what your expectations are for growth in 2017?.

So I think that, with server, we feel very positive and optimistic.

And that optimism is due to a lot of the reference designs that we have, in addition to the fact that, in the next generation Purley, we are going to be not just increasing the number of OEMs that we'll be working with, but also we'll be increasing the dollar content of going from something in the mid-teens up to the high $40 on a per-server basis.

So we see, as the rollout occurs here in the second half of the year, that we should get some good momentum. And that we really should see some sales gains occurring in the early part of 2018..

Okay. Great. Thank you..

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

Yeah. Thanks. I'll add my congratulations, guys. Maybe a quick follow-up on server since we were just talking about it.

Could you maybe walk us through or talk about the competitive landscape and what kind of visibility you guys have regarding market share on Purley, specifically later this year and as we look into 2018?.

Well, I think to begin with, on the servers, this is an area where we had essentially zero market share as recent as a couple of years ago. So this is almost a continuing greenfield opportunity for us.

Obviously, there's a couple of very dominant players in this market who are very well established as far as their relationships, as well as the technology. The feedback that we've been receiving, particularly in the area of cloud computing that we're most interested in being able to take advantage of, has been very positive.

We think that we have a unique offering that sufficiently differentiates ourself in order to be able to get the design win and also to command very attractive ASPs and margins..

Okay.

So, no hints on are there any visibility on what kind of market share you might kind of have there coming?.

I think in a earlier call that we allowed for the potential of being between 10% and 20%. And again, I think that's a long-term opportunity and what we want to do is, remember, there's well-established competitors here and that we're starting from a very small space..

Okay. Okay..

Yeah. Let me add something. Okay. And we can divide it into what the market share means, okay? And you see our servers are pretty steady growth and we will see the acceleration end of this year and next year. So which are these areas, okay? And a few years ago, our point of below (25:25) product penetrated into server.

Now it's widely adopted and across the board. And two years ago, we introduced the electronic fuse and now became almost the sole source for some of the first-tier server makers. And from a core power, we penetrated, in the last couple years, we penetrated these second-tier server makers and now we're growing the revenues.

And also, last year we penetrated a few first-tiers. However, we emphasize not on the bulk of the volumes and for a common footprint. We're not participate in that because those are lower margin product. We only concentrate on the highly efficient, high frequency. So those servers require that. And we believe in the longer term, that's the market trend.

And we will get a majority (26:41) we will get a high percentage of our market shares in 2018 and in 2019..

Got it. That's really helpful, Michael.

And then maybe as a follow-up, any update – I didn't hear you guys mention it in your prepared remarks, any update on the timing of your new website launch and where we are now with your new e-commerce initiative? And maybe as part of that answer, is there any way to help us quantify what that dollar opportunity or what that potential could be there, and what that ramp might look like?.

The programmable modules we're launching already. And you will see our – we're still selling through the traditional channels. However, the new website was delayed a little bit. But it will be either in March or in April, we will see the new website..

And if I could add to this, there's sort of a continuum here where what we're beginning to see is good traction with regard to our pre-design modules where they're generating a good amount of money, a good amount of revenue on a quarterly basis.

And then what we expect to do is introduce the new website, and that will be how we'll launch the field programmable modules as well. So I think that everything is tracking exactly as we had hoped it would..

Got it. And if I could just sneak one last one in. Just any update that you guys could give us on the Intersil lawsuit would be great. Thanks a lot..

Sure..

We can't comment too much, okay, because that's in the courtroom in the legal proceedings. And that's the only thing we said, okay, MPS will defend vigorously our IP..

Okay. Thank you, guys..

Thank you. And our next question comes from Ross Seymore with Deutsche Bank. Your line is open..

Hey, guys. This is actually Matt Diamond on Ross's behalf. I'll echo the congrats on the solid results. My question's been alluded to by some previous callers but I just want to ask it a little more directly. There was some talk in the script about the visibility into longer-term design engagements, one of which being server.

I'm curious if you could give us the rough timing of the magnitude of those random – the high-end notebook solutions were mentioned, the gaming with QS Mod, and more generally the auto design win momentum.

Is there any way to roughly time when that acceleration should happen? Or is it just the general framework that we should be thinking about, or thinking about that framework in general?.

We think in the second half of this year, in the server side the revenue will ramp, all the designing activity. Even though the core power, we still will gain a significant amount of market shares, okay? And those may not be in mainstreams, but we have in other – I'm talking about other first tiers. But it's a giant step for MPS..

And the timing of gaming and auto, should we think of that then the same way as in the second half? Or would the timing differ?.

Well, I think as far as automotive, that's a continuation of the momentum that we've been generating in each of the last three prior years. Whereas gaming, I think that we have some new opportunities that will be additive and we should look for those to start to kick-in in Q3 of this year..

Okay. And on the OpEx front, I know last year was an investment year. Could you give us your initial outlook for spending plans later in 2017? Obviously, we have the 1Q guide, but any initial color on OpEx for the rest of the year would be helpful..

Yeah. So I think you're familiar with what our long-term model is, and we want to grow operating expenses at a rate that is 50% to 60% that of our revenue growth rate.

Certainly, in 2016, we've mentioned that we had some excellent opportunities as far as generating new product investments as well as sales and marketing resources, as well as the investment in our fourth fab. And we expect to continue to invest in all three of those initiatives, albeit at a lower rate of growth in 2017.

And we do not plan to add head count at the same level as we did in 2016..

Okay. Thanks so much..

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

Close enough. It's Doradla. So....

I was going to help out..

Michael and Bernie, congrats on my end, too. So, 2017, clearly a very inflection year in some ways, right? You've got, like, these three, four product segments. You talked about the server's second half. You've got the programmable stuff, you've got autos kicking in.

So, when we step back, I think you've given some color, but if you were to sum it up really 2017 in general, it sounds like a pickup in the second half, primarily driven by the server.

And how should I be looking at some of the programmable stuff? So, if you can help us understand kind of the objects of first half/second half big picture, that would be great..

Sure. I think just the way you positioned that comment is actually very helpful to understanding the dynamics here. We actually have three, four, five unique opportunities that are coming on-stream in 2017.

And when we look at the timing and the order of magnitude for them, I think it's good to be a little bit cautious only because there are certain events that aren't 100% in our control and those that are we have some level of execution risk.

So, as we look ahead to 2018, we believe that those elements will all have sorted itself out and that we'll be able to fully capitalize on the – take advantage of these opportunities..

Yeah. Let me add on. To me, the 2017 is done. All the designing products, okay, I don't think our customer can change it. And it will take an extraordinary effort to change that.

And so when the revenue happens, okay, particularly in the cloud computing, but some of the notebooks, some of the servers and some of the data centers, and these are depending our customers. And also, the third-party really the product is like Intel's processors. And so to me, these all done within plus or minus of a few months.

So, related to other market segments like auto, this is very steady-state growth. We seen a lot more designing activities in the last couple of years. That all will translate into revenues second half of 2017 and 2018. And at the same time, don't forget we still have a high-end consumer business. IC and IoT will grow this year tremendously..

Right. So sounds like from the investment community point of view, I think we should be focused on the server opportunity in 2017. That seems to be the most perhaps material delta as the year progresses..

Frankly, I see very similar growth rate..

Yeah..

And the company designed it that way, very balanced growth, and with growth in the high rate..

Right. Okay..

Yeah. I'd have to agree with Michael there that I think that you'd be limiting the message to focus solely on servers. I mean we're, again, very excited about that opportunity, but not at the expense of what we're seeing with the high-end notebooks, what we're seeing with the gaming opportunity.

And Michael brought to light what we're seeing with appliances through the Internet of Things and high-end consumer..

Okay. Great. And finally, Bernie, your guidance of 54.8% to 55.8% on the gross margin front similar to what you guided, I think, in the December quarter.

But given that the mix and the mix shift seems to be moving towards some of these higher margin businesses, is that guidance based on just conservativeness? I mean, I'm thinking that the gross margin should trend upwards as the year goes by..

Yeah. I think that if you look at how we progressed gross margin in 2016, we went up 10 to 20 basis points quarter-over-quarter. So we ended up with gross margin in Q4 that was 40 basis points higher than the year before. And I would expect a similar trend line to occur. You are right that a lot of the new revenue growth is at higher margins.

And we're also seeing some of the investments we made, particularly with the new fab, that those should also generate improvements to gross margin.

But the thing that we want to manage first and foremost is very predictable, modest, as I said, 10 to 20 basis points increases in gross margin, and to the extent that we can afford to add in lower margin business to accelerate revenue growth, that's really what our business model is based around..

Great. Thanks a lot, guys..

Okay. Thank you..

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

Yes. Michael, Bernie, congratulations on another solid growth year. First question is on the high-voltage SOI process.

Should we think about the competitive advantage share being similar to some of your other processes, meaning being able to integrate many components? Or are there other elements to the advantage as well?.

Exactly. And including other components down the road. And we think that this is really a game change, okay? We take a look at the other opportunities and the technology that we targeted. And so we will be able to deliver signal much more cleaner. And also, we integrate a lot more than a silicon technology is capable..

Very good. And my second question is on your module business.

So could you just update us where you stand there? And are you in production already on the programmable module products?.

It is in production now. And sales volumes are very little and just at the initial stage. And these are mostly for industrial applications and also smaller customers, variety of them, and including some of the small customers in the consumer space. And so we really emphasize the website which we'll launch in March or April..

And I think that there's also a longer-term opportunity in the communications market for the field programmability.

So it's sort of an interesting product family where we're trying to encourage more of these low-end, small volume industrial and consumer opportunities, but at the same time we see a longer-term opportunity in the wireless infrastructure for the comms market..

Yeah. Forgot about the programmable product for telecom, for the infrastructures. And that we launched a product, and again you can see on the YouTube, you can see on our website, you can parallel all of them from 20 amps to all the way to 1,000 amps.

And in the APAC show (40:49) in March, we will demonstrate something like 1,000 amps or 2,000 amps solutions. And those are one of a kind and well, well received among telecom companies..

Okay. And maybe on the topic of communications, it was flat year-over-year.

And sort of in the spirit of balanced growth, how should we think about the communications market for you this year? Do you expect some growth? Or will it still maybe lag a little bit some of the other end markets?.

I think, at this point, and again let's talk about the nature of the market, you've got the gateway wireless, which tends to be a little bit low end and has some characteristics that are similar to consumer. And then you have the higher-end network, which, as we were just talking, we believe has great promise for us.

We're very committed to that part of the market. As we are just introducing the products now, and while the feedback has been very positive from the telco companies, it's like any product release, it takes time. And this tends to be a lumpy marketplace where you can – if you win a large customer, you can have a significant order.

But the time it takes to win the trust and win the relationship and demonstrate the value of your technology, it makes it a little hard to predict. So I think the way we've tended to look at the comms market is it can be any quarter plus or minus $1 million, and there will be a point of inflection but it's probably later in 2018..

Yes. Very much agree..

Yeah. Fair enough. Just one last question. We're hearing about some foundry capacity getting tight. You're obviously expecting another good growth year this year.

Do you feel like you have, with all your foundry partners, you have all the capacity in place for another good growth year this year?.

Yes. We've made the investment in order to be able to manage the growth for 2018-2019 and even beyond that. And it's not just on pure capacity, but as we're referencing as far as a partner to help us with the new technology, we feel very, very well-positioned..

Very good. Congrats again. Thank you..

Thank you..

Thank you..

Thank you. And we have a follow-up from Quinn Bolton with Needham & Company. Your line is open..

Hi, guys. Just wanted to sort of follow up on some of these new product drivers. You've got high-end notebooks ramping nicely through the year. You've got the new game console. You've got Purley power management. A lot of those seem like they're pretty back-end loaded into the second half of the year.

You typically have pretty strong seasonality with the third quarter typically the peak.

I guess what I'm trying to get a sense of is do you think that these new opportunities and the timing of those ramps could change seasonal patterns this year and into 2018? Or is it best to sort of think that those products ramp, but probably don't ramp to such a degree that it's going to change your typical seasonal pattern?.

Yeah. That's a very good question, so that we are also puzzled (44:37). MPS like a trend has a start about four, five years ago, have a transition also like into more diverse market segments. And last year, I hope that we had every quarter's consecutive growth, okay, but we think with a lack of Q4. But Q1, Q2, Q3 and Q4 is shy just a little.

And so, obviously, the pattern is changing and what we'll see probably this year is a very similar or even I can hope – I still hope we can have a consecutive quarter-to-quarter growth for four or five quarters in a row..

Great. Thank you, Michael..

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 any closing remarks..

Great. I would like to thank you all for joining us for this conference call and look forward to talking to you again during our first quarter conference call, which will be most likely at the end of April. Thank you and have a nice day..

Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program. You may all disconnect. Everyone, have a great day..