Welcome everyone to the MPS Second Quarter 2021 Earnings Webinar. Please note that this webinar is being recorded and will be archived for one year on our Investor Relations page at www.monolithicpower.com. My name is Genevieve Cunningham and I will be the moderator for this webinar.

Joining me today are Michael Hsing, CEO and Founder of MPS; and Bernie Blegen, VP and CFO. During this webinar, we will discuss our Q2, 2021 financial results and guidance for Q3, 2021, followed by Q&A session. .

Thanks Jen. MPS achieved record second quarter revenue of $293.3 million, 15.3% higher than the first quarter of 2021 and 57.5% higher than the second quarter of 2020. This broad based year-over-year revenue growth was a result of our diversified growth strategy, technological innovation and investment in production capacity.

Turning now to our second quarter 2021 revenue by market, computing and storage revenue of $87.7 million increased 30.0% from the first quarter of 2021. The sequential revenue improvement reflected increased demand and market share gains for servers and data centers and notebooks.

Computing and storage revenue represented 29.9% of MPS' second quarter 2021 revenue compared with 34.4% in the second quarter of 2020. Second quarter consumer revenue of $76.1 million increased 14.9% from the first quarter of 2021. The sequential quarterly revenue increase reflected earlier than normal sales of gaming console products.

Consumer revenue represented 25.9% of MPS' second quarter 2021 revenue compared with 25.6% in the second quarter of 2020. Second quarter automotive revenue of $48.7 million increased 8.5% from the first quarter of 2021, primarily due to increase sales of infotainment products.

Second quarter 2021 revenue was up 173.9% year-over-year, automotive revenue represented 16.6% of MPS' second quarter 2021 revenue, compared with 9.5% in the second quarter of 2020.

Second quarter 2021 Industrial revenue of $43.3 million increased 8.9% from the first quarter of 2021, reflecting increased sales of products for power source applications. Industrial revenue represented 14.8% of our total second quarter 2021 revenue compared with 14.3% in the second quarter of 2020.

Second quarter 2021 communications revenue of $37.5 million was up 3.9% from the first quarter of 2021. Most of this sequential revenue increase was due to higher product sales for networking and wireless applications. Communication sales represented 12.8% of our total second quarter 2021 revenue compared with 16.2% in the second quarter of 2020..

Our first question comes from Tore Svanberg of Stifel..

Yes, thank you, Michael, Bernie, congrats again on another strong and record quarter. I was hoping you could update us on your capacity plans. I know you've done a pretty good job here, the last 18 months, your inventory seem to be in good shape, perhaps a bit at the lower end.

But yes, maybe you could help us understand a little bit more what you specifically are doing on the capacity side..

Thanks Tore. Our capacities as always in the past three or four years and we keep expanding. And now we continue that. However, we do have capacities of over $2 billion and before the middle of next year. So we have enough capacity for us to grow. And now we have just qualifier more product and release to productions.

And ultimately in our customers' hand..

And at the expense of repeating our self story. You recall that last year, we brought up the 12 inch fab. And this year, we've brought up 8 inch fab which is already contributing to inventory.

So in both cases, what we're continuing to do is expand out by qualifying more parts so that we will be able to meet the $2 billion level by the middle of next year..

Very good. Thank you for that. And your cash balance has doubled here over the last couple of years. And it's now at $670 million. Obviously, it's a luxury issue to have. But what do you intend to do with that cash? Because obviously, you don't need that much.

So do you plan to return that more back to shareholders? Are you potentially looking at M&A? And the reason I'm asking this is because it's so high now, right? I mean, I know historically, you've grown your business organically, but it's so high now that I just have to ask the question what you intend to do with it?.

That's a good question. As a company, I keep saying we transforming the company from a semiconductor to more solution providers and so we can utilize our cash much better than we can in the past and the strategy is okay, we will buy in a tuck-in technology companies which comparable to MPS revenues, MPS as a general market coverage.

So on the other hand we are also consistently raising dividends. And that's our strategy but we're not excluding buyback shares..

Our next question is from Quinn Bolton of Needham..

You guys hope you can hear me but let me echo my congratulations on the strong revenue and the very nice, gross and operating margins. Bernie, I guess you teased us there at the end of your script, saying that you've got the capacity now to support acceleration in revenue growth.

If I look at revenue last year, you did about 35% growth looks like this year; you might do better than that.

I'm just trying to interpret when you talk about acceleration in revenue growth, what should we read into that?.

Yes, I think that you're familiar with our model, which is to outperform the industry by 10 to 15 percentage points. And, obviously, that's a model, that's a guideline.

And there are certain periods where we have the right factors both strategically as well as from a market perspective, that allowed us to do better, and sometimes not as well as that model.

So for example, if you look at last year's results, you could argue that at 34.5% growth, that we exceeded the market, which was right about 5% to 8%, depending on what you're looking at, by somewhere in the neighborhood of, 15-17 percentage points. And so we look at that is, well above our model, in the current year, obviously, we only guide to Q3.

But it's not unrealistic to expect that within the range of possibilities that we could match that performance, or in fact do just a little bit better. So what we're trying to observe here is that in this two three year period, we're actually benefiting from a lot of factors that have us exceeding what our normal model is..

Great, thanks for that additional color. Bernie, I also wanted to ask on the compute and storage business up 30% sequentially, I think you mentioned that it was share gains in both servers as well as notebooks. On the notebook side, I thought you already had pretty high share at the high end of the notebook market.

So I'm wondering if you could comment, are you starting to see share gains and maybe more mainstream or even low end or Chromebooks on the notebook side. And are there any notable areas of share gains on servers? Thank you..

Yes, so we do have some of the share gain across the board in a notebook market segment, as our technologies advanced in which lower the cost, our die size become much smaller. So the cost, the lower costs allow MPS enters a lower notebook segment..

And then as far as server, we've been fairly consistent in articulating our strategy as far as being able to grow our market position with each succeeding next generation, particularly Intel and AMD products. Not limited to that though, but also on 48 volt GPUs.

So it really expresses the point that we're branching up in share gains within the Intel family, but also branching out into these other opportunities..

Our next question is from Rick Schafer of Oppenheimer..

Thank you and I'll add my congratulations. Just kind of keep amazing, everybody, I think I'll ask one more capacity, if that's okay. And it's coming from a spending kind of standpoint.

Can you Bernie maybe remind us what the outlook for kind of spending just as a general rule as a percent of revenue, maybe starting next year, once all the new capacity is installed? I mean, I think you're getting so many questions, because everybody sees the kind of growth you guys are putting up.

And it's awesome that you have $2 billion in capacity onboard by this time next year. But at this rate, it's only going to in a couple years, right you're going to be bumping your head-on by so.

I'm curious because how soon would you have to look to begin ramping incremental capacity again? And what might impact beyond on spending? I'm curious what like, just hypothetically, in two years, three years time, if you're at $2 billion top line, like what would gross margin look like, for instance?.

Rick, thank you. Good question. Something that's really important to comment on here is that a lot of companies and a lot of analysts and a lot of investors are focused on capacity as if this is a new aspect of the semiconductor business. In fact, capacity is something that we have been managing for the 10 years that I've been hearing before that.

It's an integral component to our growth strategy. And so the way that we've been doing it is sequentially adding new fabs and also assembly houses and testing capacity alongside of that to accommodate to be in front of what is expected revenue growth.

So while we have made public comment on the fabs that we've invested in to date, we're still continuing on with ongoing relationships in order to secure more fab capacity for the future in order to accommodate that growth beyond $2 billion..

Yes, as I said earlier, so we keep expanding and we will never stop. But sometimes faster, other ones -- other times it's slower, again, other than the capacities, physical capacity itself, we have to increase a lot of haircuts, and MPS is a very, very lean, and so we will hire -- we are hiring a lot of people. .

Thanks. Sorry, I was having some trouble on my end. Thanks, Michael. And thanks, Bernie, quick question on auto, if I could, I mean, by my math, it's on track to maybe grow sort of an 80% or better range this year for you guys.

I mean, I'm curious how much of that is being either directly or indirectly limited by supply? And if you could give a sense of what growth could be or talk about growth, maybe demand that's pushed and how that ultimately would show up in the model say next year? I don't know if you could maybe quantify or talk about your auto backlog and maybe where it is today..

Maybe Bernie can, this year you said that you mentioned that whether the automotive product is limited by the capacities and the answer is not as much as other segments. Because automotive company, they give us a long lead times.

And so we prepare the last year, the last didn't, our customer didn't consume that many of our products, okay and so it all translate to this year. And so we'll be able to ship them now..

One of the aspects of automotive that's getting a lot of attention in the press has to do with the fact of electronic component shortages that are shutting down plants or limiting their ability in order to kit a car and put it assembly and as Michael just said we're actually not capacity constrained there. We are meeting all demand from them.

And what's been interesting is one of the reasons that automotive got into this bind is because they were working with a just in time inventory model. And I think that they've learned from that that when the parts the electronic components are available, that they will stock them even though they don't have a complete kit to build the car.

Now in our conversations and feedback that we're getting is they're actually only trying to satisfy real demand. But that is the timing of when the build plan, when they'll have the complete kit that they can then build the cars.

So it's something that we want to monitor because there's been no change in the ordering pattern or our shipment schedule versus expectations because of the other limitations in automotive..

Yes, I might as well add it, okay, about a year and a year and a half ago our inventory were at all time high. And that was one of the reasons that why we do that because we were a newcomer in automotive industries, okay, even though with this type of a current revenue.

We're still in a very, very little on a market -- in a market percentage of a market, and so it's a clear as a newcomer, and you don't want to upset the customers, okay, and you don't have a product. So as all these as a lack of what we do to all these key customers, we have an inventory, even though they don't have a clear forecast.

And so now is a really benefited us. And we gain a lot more design win activities. And because our competitor couldn't, cannot ship a product..

Our next question is from William Stein of Truist..

Thanks for taking my question. I hope you can hear me. With regard to first sort of maintenance question with regard to your capacity and inventory, which you've already explained quite a bit about on this call.

Are you supply constrained at this time? Are you able to meet all the demand whether it's upside, or maybe customers stretching and trying to build a bit of inventory? Or are you in fact capacity constrained? And our lead times extended as you're communicating them to customers? And then I have a big question of more sort of strategic question after that..

Yes, let me explain that way. Okay, we have less capacity constraints than compared to like a half year ago also, and however, as a customer's -- when you call, after you qualify all these new fabs, and we have a month or couple months delayed of a qualifying these product.

And to qualify in the fab, it's not exactly science, okay, mean you use different supplier or different equipments, okay, mean different materials and all the problem, all these issue comes -- have an effect on how you qualify products in the end.

So this time, okay, we just have to release a lot of new product, lot of existing product from different fabs. And so it's kind of a -- to answer your question here is the kind of a constraints, we have a lot more orders, and we couldn't fulfilled, okay mean but just only a couple of months late..

And again, what we're trying to do here is make sure that we're servicing real demand, and not building up inventory, either in the channel or on our customer shelves.

So what we've done is we've actually have very transparent relationships with our customers so that we make sure that we're in touch with their business sufficient to be able to make those trade offs..

Great, thanks. And then the follow up if I can, or the more strategic question, Michael, you refer to this transition from a semi company to a technology solutions company, and it's something I've written about specifically to transition from semi devices to modules.

Any quantification around this and perhaps it relates to the ecommerce strategy as well. Any update in that area would be very helpful. Thank you..

Yes.

Thanks for asking for that question, now is overwhelming by the revenue growth and the company but not only from analysts from outside and the company inside company is overwhelming by the revenue growth, that allocations and the product allocations and in a lot of strategic things, okay, as less pronounced, okay but the module you're absolutely right module business is for a solution, as a solution transforming to a module company as we transforming, we're transitioning from semiconductor to a solution company.

And the ecommerce, we have a teams and we finally, we have organized like a product line. And I know the activities in the last quarter also are quadruple. And so the revenue is still small, but is in the millions of dollars. Okay. I mean, it's more than a million dollars, okay somewhere $30 million - $40 million..

With a module and service?.

Yes, with the module and service and is growing, as you recall in about five years ago. Three years ago, it's almost zero. Yes. And four years ago, almost zero, okay, I mean we started that. And so we'll continue to focus on that. And so I truly believe that's our future..

Our next question is from Joshua Buchalter of Cowen..

Hey, guys congrats on the results. And thanks for taking my question. Gross margins in both the print and guide were meaningfully higher than your usual 10 to 20 basis point trajectory.

Can you elaborate on the key drivers of the leverage there? And I guess speak to the sustainability? Was it driven by mix or something on the cost side getting wafers through your recently ran fabs? Thanks. .

Sure. I think that we've discussed in the past that, again, it's our model is that we want to be able to grow gross margin at 10 to 20 basis points sequentially, over the long haul. And we've demonstrated very good consistency in being able to do that.

But much like I was describing before, this is an unusual period of growth for the company, both in terms of how fast the revenue is growing.

And then obviously, as we described in the narrative, it was that the overheads is not, which would be like direct spending or inventory provisions or anything like that is not growing at the same rate as the revenue growth. And that's where we're getting the near term leverage.

As we look out, obviously, we don't want to create an expectation that we're going to be able to grow at the same rate. But by the same token, we have established another floor level for what we expect sustainable gross margin to be..

That's helpful. Thank you. And then also on the model, I guess, you mentioned that consumer in console was a bit accelerated versus your normal seasonality. Can you remind us what you would expect the shape of the console business to look like in the second half? And maybe just give us some clues on revenue growth by segment? Thank you..

Sure. I don't know if we call it normal, okay. I don't -- I can't think of a normal anymore. Okay. Regarding to our console business, yes, we win a lot of designing, wining the next design, okay, I mean I think the business continues, okay, I mean I think you have a better judgment than us what's the seasonality now for console..

I think that Michael makes a very strong point there is that we've had so many puts and takes and different lines of businesses that have been added that the rule of thumb is not as applicable as it might have been back in 2018 or 2019. I would comment on is that we believe that we are optimizing across all of our different end markets.

And again, it's really the strength of the model is in the diversification. And whereas a lot of the traditional seasonality would have been tied to consumer for example. Now we have much higher percentage of our business that is tied to computing, automotive and industrial, and they don't necessarily recognize the same level of seasonality.

But then to sort of complete the question, I think if you look at the near term growth, obviously, the current year is benefited significantly from automotive and computing storage in particular. And we believe that going forward automotive along with communications should be our longer-term drivers. .

Our next question is from Tore Svanberg of Stifel..

Yes, thank you. I just have a few follow up questions. First of all, I have a question on your ASPs, which obviously tied to your revenue growth.

So now that you are sort of growing in the 50% range, how much of that is units versus ASPs?.

Yes, I would say if you look at last year, and last year is representative what we're doing in 2021, is of the 34.5% growth 25% of that was tied to volume, 10% was tied to price. And I think when Michael talks about the solutions business; you're looking at previously selling an individual piece of silicon for $0.20 to $0.25.

And now depending on the module, we can get between $1 to $3. And what we're looking to be able to do is design complete integrated solutions for different end applications, where those will be able to achieve for the total cost for that solution can be somewhere between $60 to $100.

So, there's the ASP on the individual component, but it's more importantly, it's having that attach rate with the total solution..

Very good. And talking about systems, how's your motor business doing? I know that's probably the highest ASP products you have.

So how's that business going?.

It's doing well, but the rest of our company is growing much faster. So it's still small. And you can't break out a percentage yet. But I think that was a -- we will more -- have a -- give a more category of our product rolls. Okay, as we divided into a more finer product line. Yes, we'll give it that number later. Okay..

Sounds good. Michael. And last one, about a year ago, you talked about getting into the medical end market any updates there? I mean, I know it's still probably very, very smallest percentage of revenue, but just trying to understand how fast your traction is in the medical end market..

Yes. We have our product now. And that's a well, we're -- we have a several things that we have ultrasound and the ultrasound, we do generate revenue, we see the revenue now. Okay and the other one is x-ray machines. Okay, x-rays.

And we put -- we have -- we are evaluating the first silicones and from our design size is but we have some issue with the fab. But that's a very minor issue, okay, I mean we will be able to solve that problems. And it is outstanding, thank you for bringing it up this. And the performance is like a 5x, 6x better than existing solutions.

So the image is a lot more cleaner now. And we couldn't deliver. And so I think the customers are waiting. And we're very excited..

One other comment to add here is the technology that we're referring to here is related to our high performance or precision analog converters, right..

Data converters, yes, right..

And this has been something that we've been working on for I think about 2.5 and three years now. .

Two and a half years..

2.5 years. And I think what is really exciting is that this is incredible opportunity. And we're very close to being able to declare that it's commercially viable in the market. So it's not just a medical which is the first end market we're going after with this technology. But the other opportunities this opens up for us..

Yes, it's same technologies, similar technologies that we'll be able to use in the telecommunication side..

Our next question is from Kevin Garrigan of Rosenblatt..

Hi, guys, congrats on the quarter. And thanks for taking my question. Just a quick one for me. I was wondering if you could tell us what percentage of your business or percentage of backlog is based on three year newer products. I think last quarter; Bernie and you had said new products introduced in the last three years were about 37% of sales.

So just kind of wondering if this was in the same range this quarter?.

Yes, the reason that we use that stuff on sort of a one time basis was to really give order of magnitude to just how dynamic this new product introduction is as a component to our growth. So right now, obviously, in such a short one quarter term, it hasn't changed a whole lot up or down.

But it's really not something that we want to be reporting on an ongoing basis. .

Yes, I think the last time we reported, is that 37%? Yes, I actually went back and look at it and was-- we actually cannibalize ourselves. And I think that's a better way, okay, rather than other big guys eat us alive. And I think that we cannibalize a quite a bit, okay; I think is somewhere as a 10% range.

Okay, all these new products, we cannibalize it. And that's why the numbers are so high..

But I would say that when there's cannibalization involved, you can bet that for market share gains against our peer companies that's really the leverageable part of this story..

Our next question is from Quinn Bolton of Needham..

Hey, guys. Just wanted to follow up on Joshua's question on gross margins. I know in the near term, better overhead absorption is driving the better margins.

But if you guys have access to capacity, and most of your competitors getting strained, I'm wondering, is there any room for you to get a little bit more to raise pricing in certain segments to take advantage of that capacity support? Or will you just continue to kind of put your foot on the pedal and try to drive as much revenue through that additional capacity to support rather than trying to do it through pricing?.

Well, yes, MPS is still a smaller, is a smallest analog semiconductor business, and at the same times, we want to have a deliver a consistent result.

And so now you see the margin even in this period, we don't fluctuate a lot because we don't -- we just pass on our costs to our customers, and we don't randomly just raise because we can now the shortage, we can gouging a price, okay, and that affected our long-term relationship with our customers.

And so we just maintain that and maintain our margins. Okay, I think this strategy fits everything, fits for us, yes..

As there are no further questions, I would now like to turn the webinar back over to Bernie..

I'd like to thank you all for joining us for this webinar and look forward to talking with you again during our third quarter webinar, which will likely be at the end of October. Thank you and have a nice day..

Have a nice day..